Report No 1975a-SYR Syrian Arab Republic t Development Prospects and Policies: Report of a 1977 World Bank Mission (In Four Volumes) Volume 11. The Main Report February 22, 1980 Countrv Programs [Department 11 Europe Middle East and North Mtr,ca Region FOR OFFICIAL USE ONLY Documeotf tihe World SaMk This smenvf arrestrictl dditrition and may ib used by may nolY^rAh4n-ste e t Lvl6sfZ ow ther oW Ia dBaiek its coztens mnay novoIha*i Iie dtdsk wthout Word Bantk authoiztion. CURRENCY EQUIVALENTS (as of December 1979) SDR 1.00 = Syrian Pounds (SL) 5.2035 US$ 1.00 = Syrian Pounds (SL) 3.95 SL 1.00 = US$ 0.2532 FISCAL YEAR Until 1969: July 1 to June 30 From 1970: January 1 to December 31 FOR OFFICIAL USE ONLY SYRIAN ARAB REPUBLIC DEVELOPMENT PROSPECTS AND POLICIES Report of a Mission Sent to the Syrian Arab Republic by the World Bank in 1977 VOLUME 1: PRIORITIES FOR POLICY ACTION VOLUME 2: THE MAIN REPORT VOLUME 3: BACKGROUND ANNEXES VOLUME 4: STATISTICAL ANNEXES This report was prepared by a Basic Economic Mission which visited Syria during March 25 to April 19, 1977. The mission was composed of Messrs. Arshad Zaman (mission chief), Basil Al-Bustany (general economist), Zmarak Shalizi (general economist), Gabriel Sciolli (fiscal economist), Delano P. Villanueva (econometrician, IMF), Keith Marsden (manpower and employment, ILO), Richard W. Gable (consultant on public administration), Ian Hume (income distribution consultant), Harry Richardson (regional and urban economics consultant), Wolfgang Stolper (consultant on development planning), and Pan Yotopoulos (consultant on agricultural economics). It also incorporates the work of a preparatory Special Economic Mission which visited Syria during October 31 to November 24, 1976; and consisted of Messrs. Arshad Zaman (mission chief), Basil Al-Bustany (general economist), Zmarak Shalizi (general economist), Boris Blazic-Metzner (national accounts), Ms. Rosalinda Dacumos (macroeconomic projections), William Grau (external debt), Javad Khalilzadeh-Shirazi (indus- trial economist), Clifford Hardy (construction sector specialist), Bernard Decaux (consultant on public enterprises), Jean David (consultant on textiles), Clive Collins (agriculturist), and Norman Rask (consultant on agricultural economics). The report also draws upon World Bank project appraisal reports, sector reports, and other internal documents. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contenst may not otherwise be disclosed without World Bank authorization. BASIC ECONOMIC REPORT SYRIAN ARAB REPUBLIC DEVELOPMENT PROSPECTS AND POLICIES CONTENTS VOL. 1: PRIORITIES FOR POLICY ACTION Contents Map Country Data Preface 1. Introduction 2. Economic Background 3. Restoring Macroeconomic Equilibrium 4. Developing a Strategy for the 1980s 5. Strengthening Economic Management 6. Conclusion VOL. 2: THE MAIN REPORT Contents Maps Country Data 1. Introduction 2. Public Administration Appendix A: The Public Service Appendix B: Local Administration 3. Development Planning and Performance 4. Population, Employment and Incomes Appendix A: Manpower Training Appendix B: Population and Labor Force Projections, 1975-2000 5. Resource Allocation, Pricing and Income Distribution Appendix A: The Price and Subsidies System 6. Regional and Urban Development 7. Agriculture and Agricultural Planning 8. Strategies and Policies for Agricultural Development 9. Industrial Organization and Performance 10. Prospects, Issues, and Options in Industry 11. Fiscal and Monetary Policies Appendix A: Public Finances: Medium-Term Prospects (Detailed Assumptions) Appendix B: The Relationship between Government Investment Program and Inflation: A Macroeconometric Model 12. Foreign Trade and the Balance of Payments 13. Towards a Development Strategy: Feasibility, Constraints, and Policy Issues Contents (Continued) VOL. 3 BACKGROUND ANNEXES 1. International Trade and Finance 2. Agriculture 3. The Public Manufacturing Sector 4. The Textile Industry 5. Education 6. Transportation 7. Water Supply and Sewerage VOL. 4 STATISTICAL ANNEX 1. A Note on National Accounts Statistics 2. Statistical Tables SYRIAN ARAB REPUBLIC DEVELOPMENT PROSPECTS AND POLICIES VOLUME 2 THE MAIN REPORT CONTENTS Page No. Maps Country Data 1. Introduction .......... ................................. 1 Economic Policy Objectives and Performance, 1970-76 ..... 3 Development Objectives ................................ 3 Economic Structure and Growth ......................... 4 Investment, Output and Employment ................... I.. 5 Fiscal and Monetary Policies .......................... 8 Trade Policies and the Balance of Payments .... ....... 11 The Third Five-Year Plan (1971-75) .................... 12 The Emerging Financial Problem .......................... 14 Immediate and Long-run Policy Challenges ................ 16 Strengthening Economic Management ..................... 16 Restoring Macroeconomic Equilibrium ................... 16 Developing Strategy for the 1980s ..................... 19 2. Public Administration and Developing Planning Structure. 21 The Administrative System ...... ...................... 21 Patterns of Authority and Decision-Making .... ...... 23 Administrative Structure ...... ..................... 24 Administrative Reform ....... ....................... 28 The Public Service .....................-... 29 The Planning Process .................... 29 Planning Machinery .................... 29 Plan Formulation .................... 30 Development Project Administration .32 Conclusions .33 The Budget Process .33 Budget Formulation .34 Budget Execution .36 Conclusions ........................................ 37 Recommendations ...................................... 37 Appendix 2A: The Public Service ...... ...................... 40 Growth of the Public Service ...... ............ 40 Classification and Salary Scale .... .......... 41 Selection and Placement ..... ................. 45 Training .......... ........................... 46 Contents (continued) Page No. Appendix 2B: Local Administration ............................... 49 Structure and Responsibility ...................... 49 Ministry of Local Administration .... .............. 52 Conclusions ....................................... 52 3. Development Planning and Performance, 1960-75 .... ........... 53 Economic Performance Before Planning ...................... 54 Growth Under Formal Planning .............................. 56 Planning Methods ........................................ 57 Indicators of Growth .................................... 59 Effect of Change in Price Structure ..................... 60 Investment and Output .................................... 61 Employment, Productivity, and Investments .... ............. 64 Growth, Consumption, and Savings .......................... 66 Plans and Achievements .................................... 70 4. Population, Employment and Incomes .74 Population Growth and Urbanization .74 Labor Force and Employment Problems .81 Labor Force Participation .82 Unemployment .83 Employment and Productivity by Sector of Activity .83 Public and Private Sector Employment and Productivity 88 Occupational Status ..90 Household Income and Consumption Disparities . .93 Public Sector Salary Scale ..99 Real Wage Trends ................... ..................... 100 Medium Term Labor Force and Employment Projections ...... 102 Appendix 4A: Manpower Training .................................. 109 Vocational Training ............................... 109 Management Training ............................... 112 Appendix 4B: Population Projections, 1975-2000 .................. 118 5. Regional and Urban Development .............................. 119 Urban and Regional Trends in Perspective .................. 120 The Urban Hierarchy ..................................... 121 Demographic Trends ...................................... 122 Ecconomic Differentials ................................ 124 Social Indicators ....................................... 126 Interregional Migration ................................. 126 The Framework of Regional Planning ....................... 128 The State Planning Commission and Local Projects .... .... 129 The Ministry of Local Administration and Decentralization 130 The Ministry of Housing and Utilities and Regional Planning . ............................................. 133 Contents (continued) Page No. Issues . .................................................. 134 Goal Conflicts ......................................... 134 Location of Industry ................................... 135 Housing . ................................................ 137 Water Supply and Infrastructure ........................ 143 Transportation ......................................... 144 'Urban Planning .............................. 145 The Euphrates Basin .................................... 146 Tourism and Regional Development ....................... 148 Recommendations .......................................... 149 Regional Planning ...................................... 149 Regional Policy Instruments ............................ 150 Housing ............................................ .... 151 Urban Planning ......................................... 152 Other Recommendations ................................. 153 6. Resource Allocation, Pricing and Income Distribution ....... 154 Planning and Investment Allocation ...................... 154 Balance of Investment and Savings ...................... 155 Direction of Investment ................................ 156 Efficiency of Investment ............................... 159 The Role of the Banks .................................... 160 Pricing Policy and Procedures ............................ 161 Price Adjustments and Cost Response .................... 162 Prices, Planning, and Resource Allocation .... .......... 163 Prices and Efficiency .................................. 165 Prices and Equity ...................................... 167 The Subsidies Issue ...................................... 169 Equity Impact .......................................... 170 Cost Implications ...................................... 171 Efficiency Implications ................................ 171 Budgetary Implications ................................. 172 Macroeconomic Implications ............................. 172 Income Distribution ...................................... 172 Recommendations .......................................... 177 Appendix 6A: The Price and Subsidies System in Syria .... ....... 179 The Price System ................................ 179 Prices Under Central Control .................. 179 Prices Under Indirect Central Control .... ..... 181 Prices Under Decentralized Control .... ........ 181 Free Market Prices ............................ 181 Price Setting, Adjustments and Price Supports 182 The Administration of Price Control .... ......... 183 Price Setting in Industry .................... 183 Price Setting in Agriculture .................. 184 Tariff Setting of Public Utilities and Services 185 Foreign Trade Prices ......................... 185 The Subsidies System: Method and Magnitudes ... 186 Sugar . ........................................ 186 Rice ............. ............................. 189 Contents (continued) Page No. Vegetable Oil ...................................... 190 Bread . .............................................. 192 7. Agriculture and Agricultural Planning ......................... 195 Agriculture as a Limiting Factor in Syrian Economic Development .............................................. 196 Main Features of Land Use and Ownership .................... 199 Components of Production, 1964-74 .......................... 201 Approaches to Agricultural Planning ........................ 202 Agricultural Planning in the Fourth Five-Year Plan (1976-80) 204 The Policy Instruments and the Feasibility of the Agricultural Plan ...................................... 207 Future Prospects ........................................... 212 8. Strategies and Policies for Agricultural Development .... ..... 215 Policy Options on Land Utilization by Region .... ........... 215 Potential for Increasing Output in Rainfed Agriculture ... 217 Potential for Developing Irrigated Agriculture .... ....... 220 Potential for Range Management and Livestock Production .. 221 The Equity Impact ........................................ 223 Policy Options on Prices ................................... 224 The Institutional Framework ............................. 224 The Resource Allocation Function of Agricultural Prices 226 The Income Distribution Function of Agricultural Prices 229 Agriculture as a Leading Sector ............................ 231 The Drive for Self-Sufficiency ............................ 231 Agroindustries ........................................... 238 Cotton and Textiles ...................................... 239 Sugarbeet and the Sugar Industry ......................... 241 Economic Analysis of Sugarbeet Relative to Cotton .... .... 242 Conclusions and Recommendations ............................ 246 Agricultural Planning .................................... 247 Resources for Agriculture ................................ 248 Institutional Factors and Policies ....................... 249 9. Industrial Organization and Performance ...................... 251 The Emergence of Public Manufacturing Enterprises .... ...... 253 The Private Manufacturing Sector ........................... 254 Government Incentives to Industry .......................... 255 The Protection System .................................... 255 Import and Foreign Exchange Regulations .................. 257 Price Control ............................................ 259 Regulation of Private Investment ......................... 260 Tax Incentives ........................................... 264 Industrial Development and Performance Since 1960 .... ...... 264 The First Plan Period 1960-65 ............................ 265 The Second Plan Period 1966-70 ............................ 268 Development Strategies and Performance 1971-75 .... ......... 270 Integration in Manufacturing ............................. 273 Co"4tents (continued) Page No. Location of Industry .................... 274 Employment and labor Produtivity ......................... 275 Utilization of Capacity .................................. 276 Price and Wage Trends .................................... 278 Export Performance of Manufacturing Industry .... ......... 281 Financing of Manufacturing Investment .................... 284 Financial Performance of Public Enterprises .... .......... 285 10. Prospects, Issues and Options in Industry .................... 290 Public Manufacturing Investment in the Fourth Plan 1976-1980 290 Investment Implementation Constraints ...................... 293 Medium-Term Growth Prospects ............................... 294 Employment Generating Effect of Planned Investments ...... 297 Export Outlook ........................................... 298 Objectives dnd Strategy: Some Observations and Recommendations ........................................ 299 Size of the Investment Program ........................... 301 Choice of Factor Proportions ............................. 301 Recommendations on Strategy .............................. 302 Industrial Planning ........................................ 304 Management and Financing of Public Manufacturing Enterprises 306 Planning and Organizational Options in Public Manufacturing Sector ............................... 307 Investment Planning and Project Selection .... ............ 308 Management ............................................... 309 Targets and Incentives ................................... 309 Investment Financing Options ............................... 311 11. Fiscal and Monetary Policies ................................. 313 Growth, Welfare and Employment, 1966-76 .................... 313 Factors Affecting Public Savings ........................... 316 Structure of Public Revenue .............................. 319 The Surplus of Public Enterprise: Gross or Net? .... ..... 320 Low Buoyancy and Inadequate Performance of Direct Taxes .. 321 Allocation of Public Expenditure ......................... 325 The Role of Monetary Policies ............................. 331 Credit Policies .......................................... 331 Mobilization of Savings .................................. 332 The Impact of Inflation ................................... 334 Impact on Welfare ........................................ 335 Impact on Public Savings ................................. 336 Medium-Term Prospects ...................................... 338 The 1977 Budget .......................................... 338 Projected Public Finances, 1978-80 ....................... 339 Recommendations: Fiscal Policy ............................ 341 The Size of the Public Sector Investment Program .... ..... 341 Current Expenditures ..................................... 343 Tax Reform .............................................. 345 Tax Administration ..................................... 345 Equity and Efficiency as Tax Policy Targets .... ........ 346 Recommended Changes in Tax Structure ................... 348 Contents (continued) Page No. Recommendations: Monetary Policy ......... ................ 350 The Role of Monetary Policy ......................... 350 The Role of Interest Rates ............................... 351 Appendix lIA: Public Finances: Medium-Term Prospects (Detailed Assumptions) .................... 353 The 1977 Budget .................... 353 The Medium-Term Prospects: Alternative Scenarios and Main Issues .............. 355 Scenario A: Accepting Plan Investment Target with Tax Revenues Increasing at Expected Built-in Elasticity .... ........... 357 Scenario B: Plan Investment Target with Maximum- Improved Tax Effort (Unfeasible) 360 Scenario C: Reduced Investment Level with Maximum-Feasible Tax Effort ....... 363 Estimates of Tax Elasticity Under Inflation 366 Appendix 1lB: The Relationship Between Government Investment Programs and Inflation: A Macroeconomic Model ... 370 A Macroeconomic Framework for the Syrian Economy.. 371 A Monetary Model of Inflation .................... 373 Real Private Consumption ....................... 374 Real Imports ................................... 375 Inflation .................. 375 The Complete Model ..... ............. 376 Simulation Results ..... ............. 376 The Inflationary Impact of Alternative Government. Investment Programs Under the Fourth Five-Year Plan, 1976-80 .................... 382 Conclusion .................... 385 12. Foreign Trade and the Balance of Payments .................... 386 Developments During the Third Five Year Plan (1971-75) ..... 389 Unrequited Transfers ....................................... 396 Developments in the Balance of Payments in 1976 .... ........ 398 International Trade and Payments Objectives of the Fourth Five-Year Plan (1976-80) ................................. 400 General Assessment of Medium-Term Trade and Payments Prospects 400 Basic Recommendations ...................................... 414 Decelerating the Rate of Growth of Imports .... ........... 414 Improving Domestic Resource Mobilization Capabilities Relative to Domestic Investment Requirements .... ....... 416 Developing Foreign Trade Perspective Planning and Budgeting Capabilities ................................. 417 Expanding the Role of Financial Policy .... ............... 418 Promoting Exports ................. 419 Developing and Implementing a Clear Set of Policies on the International Mobility of Factors of Production ........ 421 Improving the Data Base for Foreign Trade and Balance of Payments Analysis ................................... 422 Contents (continued) Page No. 13. Tow;ards a Development Strategy: Feasibility, Constraints and Policy Issues ................................................ 423 Short-Term Adjustments to the Plan ......................... 423 Dor.ger-Term Adjustment and Policy Needs .................... 431 Constraints to Development ................................. 438 Projections to 1980 ............................... ....... 439 Tentative Projections to the Year 2000 ...... ............... 441 Policy Problems ........................................ 447 Pro j.ct Preparation ........................ . ... 447 Pr-ojecLs and the Budget ....................... 448 Price Policy, Wage Policy, and the Budget ..... ........... 451 Subsidies and the Budget ........... ...................... 454 Summary: Principles of a Policy Package ..... ............ 457 Amre;adix 13A- The Fourth Five-Year Plan (1976-80) .461 The General Tenor of the Plan .464 Growth by Sector of Economic Activity .465 Sector Targets and the Investment Program .467 Proposed Financing of the Plan .474 T k~~~~~~~~~~~~~~~~~~~~~~~k ._IL | SY1AN AAS sT U R Ke, E y M E D I r E R R A N E A - 5 EA L.. , J! 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TURKEY * j T ~~~~~~~~~~~ ~ ~~~~~~~~~~U R K E Yr jJORDAN\ -- UP/lOLl S~~~AUDI ARIABIA Hotseh *AIeppo~ / -.4 .14/eb 5 Aoeod ~~~~~~~~AI-RooRo Deie-oo--Zor -I I RA Q dy~ ~ ~ NOS TarROUS ~ ~ ~ ~ ~ m p - World ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~hok -t-ff ~~~~~~~(NJ I t~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~h. repot to e.h/h ,t, a~tt-che (.0-5 7 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~The d--om,na,-o -td-d the Word Book od to aPhotto, any SYRIAN ARAB REPUBLIC ~~~~~~ ~~~~POPULATION DENSITY POPULATION OF LARGER CITIES. ,r. ~~~~~~~~~~~~~~~~~~~~~-25000- 500000 "~~~~~~~~0 .c S hOOh~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~l-00000 40 1050 0yi 200 000 200 001 - 500OM / ' ~~~~~~~~~~~~~~~~~~~~~~~ ~~~~PERSONS PER SQUARE KILOMETER' - -~~~~~~~~~~~ -NJ- ~~~~~~~~~~~~~~~0--3.9 IS R / ae* \Al0.-4 - 19 J -~ ~ ~~~ JORDAN me hn1 ( 0--*~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 0 0~~~~~~~~~~~~~~~~s 100 15005 0 \ / 0 ; ; 0 : ; : 0 i ol0 :: ;i : t i ; :d i ; 0 :: (5 0 3 / T : 0 )/ , e\00000 \ff 4>000 Vzt;0000 0000ffff00000000\Sa 0D'iW. \ g : : ) ) :i C f f :'4 S; : 9 : : a ; fEf b :ia \ S f ( y 2 -K h f a 1 :iS t S S tE f (; f ; ; H . $ef .f N zfiSyjf0X;? f f:SoD -, K ~~~~~~~~~~~~~~~~~~~~~~T u R K F Y -N,~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ ~ ~~~~~~~~~~~~~~,3 ,333033 3~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2 A~~~~~~~~~ 0333.3, '> ~~~~~~~~~ I 'i"'"""~~~~~~~~7 "D<.< '-'------. 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LL'SRS -'.-,-J- ,5R9YA9Nt '~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ &RJdN iN R SYT ET M. Z BRA RE IT _ YA.EP AK~~~~~~~~~~~~~~~~~~~~~~ t;0X,J~~~~~~~~~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~ -(/ ' i- % /'/ ~~TRANSPORT SYSTEM AND PETROLEUM 'tO M EJELY .0 '/ ? ~ .OYJP I'J P I RE L I NE S '-3---.. I~~~~~~~~~~~~~~~~~~~1A11LT -- . /Y A_ 30 AS MA WA JAY -33 , jAN'C A J R 0 A N - . ; __| _* ^- * __ I S SN Rmwn~3 a A L IY EID DAR ~ ~ ~ ~ ~ - J 0 R D A N 17 1 20 0 20 10 w MD~~~~~~ o ELOMEER ____________________ _______________ Al7' 38'42' M AY 1978 .qq lk, A_ ___IBRD 13560 jTArIR,_ - A SX* E:~~~~~~~~~7 4)'.Rssf j/\. /Mvdn -z To Kclokh Ho ,rs\/ )/ 3,. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~Db - dooo. A /o 9 ROI RE RHRI P AIOW ER STA TION CA.. 4., Kobo2 \, A MAIN POWER SlAlION5 Sidwr,: ) :; tL~~~~~~~~~~~~~~~~~AMASCUS \yt RIRRAROSH POWER S'AIION LOANS 9R6 AND 144 SYR 6Js SASAIN NR OSRCINO f > r /Q y t\Mid=~~~~~~~~~~N2 "pddh ERTEN510N LOANS 93R6 AND '4S4RRUCRTI> Al N -~~V J * > 2-/ 1 X1 _ \ /'/ . s1 T U/ ERK,ELIST NO 230Kv INKS AND USTALSIONS F~~~~ ~ ~~ ~ ~~~~~~~~~~~~~~~ ~ ,X , SA u6buh B K ~ * V - RUTA)RE 3 KU NS ARSISAON Am,. h' ~ ~ ~ ~ ~ ~ ~ ~ ~ NVI U. / If~~~~~~~~~~~ ~ ~ ~ ~~~ ~~~~~~~~ SI R~ A E___ Mt/JoRDA N ; IRNAOPARSCU>F g~ ~ ~ ~ ~ ~ ~~ ~~~~Sob A' E | hsm5 rDW~rAtr h sSMrX/I SDb#d0Z;11 f ) ,rABR RAI8WAYS CItES g~~~~~~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~ 1 .6 -, /EU Al'/M~ 0 TOWNS / h ea wTso s OVJ n nQMben r I trkEBO-S_ _ y5~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.~ JORDAN ~ ~ ~~~~~ - A SCSYIA ARAB 'TOBL( - / \ R~~~~~~~ M I PORWER, SA I N A o,o ,A Sh- !-JAUTLRE,MY,wr~, A J SAD AHRALPWE TO'IN (I N-..~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~XS G20VIIF N USAIN I ~ ~ ~ ~ ~ ~ ~ ~~ ~~~~~ 'A'~~~~~~~~~~~~~ ~~~~~~ N,,~~~~~~~~5 R ANOTERYRAD IBRD 13559 TURKEY - -9 T7,REEC ~~~~~~~~~~~~~~~~~~~~~~~~~~~ > VA~~~~~~~~~~~ES 3; r *3_3 / T U R K E Y / ..ESYIHL '3u 7737; ES r ' " \~" U3337. FRI MACUA 47-7 ~ ~ ~ ~ ~ ~ ~ A r'37373, 6A'U ALJI R A 130; 7 E' H :ER/ RESSF \ j "m o! '' E ';i''*J0 ; A A \ t\z < 737 0 8 R 0UL3 7; L; . |- 7 . , 3'yR PO I(t A K R Y j t 7 i 0 vi' 0 TAA,I "'.-" '-'rs TAMI V -0 'LEBAS 11 X i1 TanAFN/' U - ;E3 .3 UN ... . | J EI /--N / > "'pS55 ,'\ r - -KHALDOON / SYRIAN ARAH REPUBLIC ; $ i ~~~~~~~~~~~~~~0-:, ,AAANIA E A; E -lMA A R /TE L ECOMM UN I CAT IO N : ' ; '8 hlOO D A7f A /Bi 2 ~ ~ ~ ~~ ~ ~~~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ / s-~E-N-t-rA4psE - ; 00A7'L A 4 uNAlFAL IMF THTELE TFSTM ATONT : : / ff \ > > Q /7*27737 N TARFAN AA ATI7TALSCHIRN LR S 1- - - -M 333. "'0r*PA FA /IE.il. 0 T -LAA/ :' I ' ,/-s_-T (% K.A.O ORDA / 3po _ ) 8> ~ _ _ _ .We ._ tp7 7 - - 32 AY1/ COUNTRY DATA - SYTDS ARAB REPUBLIC Poga 1 of 2 -ores AREA POPULATION DENSITY (1977) 185,179.7 sq. kn. 7.84 million (mid-1977) 42.33 per square ko Rate of Growth: 3.3% (from 1970 to 1977) POPULATION DISTRIBUTION (197E) HEALTH (1976) Crode Birth Rate (pee 1,000) 47.78 Population per physician (1976) 2690.00 Crude Death Rate (per 1,000S 15.40 Population per hospital bed (1976) 936.00 INCOIME DISTRIBUTION (1978) DISRITBUTION OF LAND OWNERSHIP 1 ef national incoe, highest quintile . . . 21 owned by tep 107, of o-ners . . . Eoweet q,intile ... 1 owned by snallest 107 of owners . . . ACCESS TO PIPED WATER (1972) ACCESS TO ELECTRICITY (1970) Oceupied d-elliegs without piped water (7.) 58.00 i, o; ppoplatten - total 41.7, - rul 10.32/ MICTRTTION (1971-73) Calorie intake as % of requir-nemts 104.00 ECCiATION (1977) par capita proteie intake (gracs/day) 75.00 AduLt literacy rate et SE.00 Prirary scheol enroll-ent% 89.00 GNP PER CAPITA in 19.e61'b: US $930 GRODSS NATTONeL PRODUCT (1976) Growth Rate ';S$ Mn Z 1966-1971 1971-1976 GhP at Market Prices 6,254 100.0 6.5 6.2 Gross Domestic nv-estnert 1.378 30.0 13.2 10.9 Gross Natioaal Sevini _ 1,048 16.8 13.6 -14.0 Current Account Balance -772 -12.6 Expert of Goods, OFS 1,347 21.5 6.9 1.7 Import of Goods, NFS 2,545 40.7 7.6 15.9 OUTPUT, EMPLOYMENT AND PRIDUCTIVT1TY IN 1976 tI Value Added Labor Feen P. A. P-n Wrk-er US8 million 7 Thousands 7 Us. 1 Agrionltu-e 1300.3 19.8 579.0 31.7 2073.0 20.7 Industry 1275.8 21.1 306.0 16.7 4169.0 41.5 Scerines 3576.1 39.1 94.30 21.6 3792.0 37.8 Total/Average 6052.2 100.0 1828.0 1D3.0 30334.8 100.0 GOVERMIENI FINANCE Central Gveument17t 1975 1976 1977 1975 1979 Million BE i. of GDP lI f GDP lillian SL iof GD3 Million SL ° of GDP lillion SL , of SOP Co-rent Re-eipts 5701 29.2 5821 24.9 6057 23.5 7311 23.8 9400 26.1 Carrent Expeoditore 9663 49.5 11258 4t.1 12973 50.3 13346 43.5 18000 50.0 Curre-t Definit 3962 2D.3 5437 23.2 6916 26.8 6035 19.7 8600 23.9 Capital Eapenditueos 4502 23.0 5212 22.3 6339 24.6 6013 19.6 7000 19.4 ol This dato sheet has beee prepared on the basis of the most recent data a-ailable in Decembe- 1979. Consequently data der 1976 (aud earlier) presereed in this data sheet may be at -arianne with 1976 data presented elsewhere in this report. b/ The per capita GNP cotinate is -alcalated by the sane conu-e.sto te-hnique as the World Bank Atlas, 1979. All other conweesiens tE dollars is this table ore at the average e-ehonge rate pro-ailing dsring the p-riod caereed. 0/ At tureent market prices. COUN'TRY DATA - SYRIAN ARAB REPGOIL C Page 2 of 2 face MON3EY, CREDIT AND PRICES 10-72 19_73 1974 1973 1910 1977 (Million OR ot6tooding end period) - 7 Money Sopply 3151 3797 5540 6958 8599 10893 Beek C-odit to Poblin Sotore 4006 3663 3515 6669 11271 8161 BRok Credit to Pri, te Sette 5787 653 6g1 S89 1249 1339 (Pernootage 1o Rodeo C.o-bero) Money an C. of GDP 35.0 39.1 39.4 35.8 34.9 41.9 Conerol Price Index (1962 = 100) 129.0 171.0 195.0 209.0 235.0 356.0 Annal pertentage thnges ion: Genoral Prite Iden -5.4 32.6 14.0 7.2 13.4 8.9 Bank credit ta Pgblic Seettr a. C of GDP 44.5 7.7 39.3 34.3 4S.7 31.3 Bank -redit t0 Primote Settor 00 % of GDP 6.4 6.7 4.9 4.4 5.1 5.1 BALANCE OF PAYM IERNTS MR 1974 197; 1976 1977 1978 US $ Million Expo-ts of Goode 793 943 1,065 1,077 1,068 Oil 644 Ir.ortn of Goode 1,122 1,561 3 270 2 625 2,415 Ph-ophote t6 Trade Gap (deficit = -) -339 -618 -1,205 -1,548 -1,347 Cotton 182 S-rmie (ent) 45 -3 -21 137 -5 Manfactured Goods 42 Net lfansfers 460 715 45___ 44 882 All thte eoee:odirieo 131 Balaeme no Curten. Atot 10C69 9 07 -470 Tetal 1,062 Net SMT Be-raeiBg Disbursemeotb 816 10 34_ 832 61D9 TRNAL DEBT. ECEPIBER 31, 1975 Amortization _06 _. 8 _ 8 22° b30 US Million -1 -28 198 . 33 Public Debt, in-loding garaeed 1528 Non-goaranteed Primate Debt -- Other Capitol (- ) 11 1 5 10 99 Total outsandiog & Disbursed 1528 Ceoreone to Roomers 4±) 159 7213~~~~~~~~ET EJ3 SOSE3000CR RANTIO fe 193377 Grase Reerves (-nd year) -94 730 35£ 5 407 Publia Debt inaluding gRera-teed 7.4 Pitreleo Iports 6/ T4 139 194 445 331 N-ou-eratsed Primate Debt -- Petrrleo Exports d4 432 651 665 617 640 Total -eato diog 4 Diob-,od 7.4 fold ci 4424=1551 VRAo~~~~~~aT) 1550/IDA LONBIOG, (DetanSen 31. 1973) (Milliac Cdl) CORAL IDA L T-A - ,Sooeul Amerasee otatonding & DiGbure-d 72.3 30.0 102.3 9L74 1953 1963 1472 2973 599 Odtstoadg in8luding 1.C = 3.7227 7. 3.3875 1.95 3.95 3.9S rediesb-red 319.1 68.2 367.3 SL 1.00 = C.2686 0.,70 C.2572 0.253 05.213 1.73 d/ Ceude and de-i-atives. 0/ Debt Seevice net of interest eared on foreign -exhange reserves an a percentage of E,peris of Geeds ted Non-Fattor Servies. Mot available -- Ron applicable CHAPTER 1 INTRODUCTION 1/ 1.01 Thz Syrian. Arab Republic covers an area of about 185,000 square kilometers (7i,500 square miles) stretching from the Mediterranean shore and the Lebanese border on the west to the Iraqi border on the east and from the Turkish border in the north to the Jordanian border in the South. A narrow and fertile strip of land along the Mediterranean is flanked by the Alawite mountains which run parallel to the sea. East of the mountains, the fertile Jezira, which contains the bulk of the cultivable land, pasture and steppe, stretches between the Euphrates and Tigris river Valleys. To the south lies a wide plateau which slopes gently eastward, consisting mainly of steppe and desert. With an estimated population of 7.9 million in 1977, Syria is not densely populated arnd the cultivable land per inhabitant (about 1.1 hectare or 2.7 acres) compares favourably with that of other Middle Eastern countries (see Table 1.1) 2/ Land and water rank just after its population as the major resources of the country, and agriculture is the largest single sector of the economy, supporting an estimated 50 percent of the population with some 17 percent of the gross domestic product (GDP) in 1976. Among minerals, only oil, phosphates and rock salt are known to exist in sufficient quantities to mnake commercial exploitation feasible. Petroleum reserves with a high sulphur content (4 percent) were discovered in 1956 in the northeast and production, started with one million tons in 1968, increased to an estimated 10.5 million tons in 1976, almost 90 percent of which was exported. In 1978, proven oil reserves are estimated at about 25C million tons, with exploration activities concentrated iTI a number of promising areas. Phosphate deposits (low grade: 1/ Same as Chapter 1 of Volume I. 2/ The cultivable area is estimated at about 8 million hectares (20 million acres), or 43 percent of the total land area, but only about 6 million hectares are under continuous cultivation; of this, less than 3.8 million hectares are actually cropped, with the remainder being left fallow. Most of the agricultural production takes place in a band of relatively high-rainfall areas along Syria's western and northern boundaries that receive an average of 500 to 800 millimeters (20 to 33 inches) of rain a year. Yet Syria is rich in water resources for irrigation. In 1976, an estimated 530,000 hectares of the land under crop were irrigated and upon completion of the Euphrates irrigation development (construction of the main body of the Euphrates Dam was finished in 1973/74, and ancillary investments were completed in 1978), the irrigation of a further 40,000 to 60,000 hectares will be possible by 1980 (See Volume 2, Chapter 7, paras. 7.20 and 7.27). Another 200,000 hectares outside the Euphrates river system have also been identified by the Government as suitable for irrigation. -2- 30-32 percent concentration) are estimated at around one billion tons 1/; production started in 1971, was estimated at 500 thousand tons in 1977, and is expected to increase to 2 million tons by 1980, with the greater part of the output to be processed domestically into fertilizers. Table 1.1: COMPARATIVE DEMOGRAPHIC DATA FOR SELECTED ARAB COUNTRIES, 1975 Saudi Item (Units) Syria. Iraq Jordan Kuwait Lebanon Arabia Population Total (000's) 7,355 11,067 2,688 1,085 2,869 8,986 Growth Rate /a (% per year) 3.2 3.4 3.3 7.4 3.0 3.0 Under 15 (% of total) 49 48 46 43 44 44 Urban (% of total) 47 61 52 86 61 86 Density /b (per km ) 40 28 28 60 250 5 Adult (Age 15+) Illiteracy Rate Males (% of Adults) 40 41 - 37 25 73 Females (% of Adults) 80 75 - 58 48 91 Life expectancy (years) 54 53 52 66 64 44 /a Estimates for 1970-75. /b 1.0 square kilometer = 0.38651 square miles. Sources: International Labor Office, Manpower and Employment in Selected Countries: Some Critical Issues, Geneva, (1976). United Nations, Economic Commission for Western Asia, Population Bulletin, No. 9 (July 1975). 1/ One metric ton is equivalent to 1.1023 short ton or 0.984 long ton. ECONOMIC POLICY OBJECTIVES AND PERFORMANCE, 1970-76 1.02 Since the attainment of independence in 1946, Syria has had several changes in regime which resulted in a shift of power from groups of landowners, traders and industrialists to a rising class of officers, technicians and civil servants, as well as in a shift of the economy from an essentiaLly laissez-faire system to one that is largely publicly owned and regulated. 1/ The Ba'ath Socialist Party -- the ruling party since 1963 -- has provided substantial continuity of emphasis on economic and social development poli- cies which have, by and large, continued to prevail in spite of internal government changes and tensions within the Middle East. During the 1960s land was redistributed to large numbers of formerly landless peasants, under the agrarian reform program. In November 1970 General Hafez Assad became President of the Republic and his regime has since been characterized by a balance of firmness and conciliation in domestic policies; by economic prag- matism; and by a concerted search both for a better-defined role for the private sector in the centrally regulated economy and for diversification in foreign economic relations. All these aims have been pursued graclually and cautiously; in spite of recent events in the Middle East, substantial reorientation of economic policies and some diversification of production has been achieved. Development Objectives 1.03 Since the Revolution of 1963, the fundamental economic objective of the Government has been to build a planned socialist economy, so as to provide social justice and economic prosperity domestically, and further the cause of Arab integration externally. The foundations of the country's socialist economy were laid by the nationalization acts of 1963-65, which were not without their impact on the private sector, and which resulted in an emigration of managerial talent and a capital flight of perhaps $1 billion (mostly to Lebanon). The initial period (1963-70), characterized by' both domestic and external political uncertainties, was a period of transition 1/ All mineral deposits are exploited by state-run enterprises and except for small workshops employing up to ten people all industrial establish- ments are government-owned. The state owns and controls the foreign trade corporation; public enterprises also handle the marketing of cotton and cereals. The banking system is state-owned and controlled by the Ministry of Economy and Foreign Trade. Agriculture is still largely private but the government exercises a strong influence in this sector by the redistribution of expropriated land through cooperative societies, state farms, and publicly owned marketing and credit institutions, and of course, through the control of pricing and other incentives. Small- scale activities left to private enterprise include small-scale industry; crafts; some retail trade; commercial trucking and taxi transport; con- struction and housing, and a variety of services but these are subject to an elaborate system of price controls, licenses and other regulations. - 4 - marked by economic austerity in economic policy and a search for the appro- priate design for economic (and industrial) management by the public sector. At the same time, the Government launched, with assistance from East German planners, the first substantive economic plan (The Second Five-Year Plan, 1965-70), under which it embarked on a major program of mineral and industrial expansion, primarily at the expense of agriculture. 1.04 The Corrective Movement of 1970, initiated under President Assad, stressed the continued commitment to the objectives of the 1963 Revolution, but heralded a significant re-orientation in political and economic priorities. In politics, the principal events were the formation of the People's Assembly (1971), and of a broad-based multi-party Progressive National Front (March 1972), which sought to enlarge the domain of domestic political participation, most notably through greater devolution of administrative powers and by the expansion of the role of the Ministry of Local Administration. The Constitu- tion of 1973, which formalized the new directions, specified in the economic domain, that the Syrian economy would be a planned socialist economy, motivated by the abolition of all forms of exploitation (monopolistic and commercial profiteering); directed toward Arab integration; committed to equitable progressive taxation to achieve social justice; and obligated to provide employment to all seeking work. 1.05 Significantly, the right to private property (and bequests) is guaranteed under the Constitution, and expropriation is prohibited, except when of national interest, in which case the Government is bound to pay equitable indemnity. The Government has been at pains to restore private sector confidence, and has defined the domain of private sector activity: essentially retail trade, tourism, transport, construction, light industry (including assembly industry), and agro-industries (particularly, poultry and cattle-raising) provided they are in keeping with the Agrarian Reform Law. At the same time, the Government has stressed that along with the rights of the private sector, there are certain duties which it must fulfill in a socialist (more correctly perhaps: mixed) economy; the state will not tolerate excessive profits, nor rents collected by the private sector, particularly in distribution activities. Economic Structure and Growth 1.06 The transition of the economy during the 1960s and the 1970s from a predominantly laissez-faire structure to an incipient socialist one and the unavoidable political and administrative instability of the transi- tional period have had far-reaching effects on economic performance. Private sector initiatives and investment declined while public sector investment, particularly in industry and infrastructure, gained momentum only slowly. The economy was reportedly growing at a rate of 5 to 6 percent a year before 1957 (firm data are lacking, but this magnitude of growth is thought to have occurred from 1948-57: see Chapter 3, paras. 3.06-3.10) but slowed down to less than 3 percent a year from 1957 through 1960 as a consequence of political instability and its adverse effects on business confidence, inadequate invest- ment in infrastructure, and stagnant agricultural output following four successive drought years. The overall growth record during the 1960s and the 1970s is quite remarkable, despite severe growth constraints imposed by the poor performance of the agricultural sector, but conceals an underlying weakness in Syria's economic development in that the bulk of the increase in value added (GDP) has taken place in the service sectors. This service- dominated aspect of growth has resulted in very slow growth of the tax base and the export potential of the economy, with serious consequences for macroeconomic equilibrium. Table 1.2: ECONOMIC STRUCTURE AND GROWTH, 1960-76 Structure (%)/a Growth (% per year) Est. 1960 1965 1970 1975 lb 1960 1970 1976- -65 -70 -75 -76 GDP at 1963 Factor Cost 100.0 100.0 100.0 8.0 5.5 8.2 7.4 1. Agriculture 21.7 21.9 21.2 16.4 -2.4 6.8 6.0 2. Industry 23.0 21.8 27.3 2.8 9.4 ].2.1 6.8 of which: Manufacturing (19.0) (15.5) (15.8) (2.2) (6.6) (7.4) (8.0) 3. Services 55.3 56.3 51.5 6.6 6.9 5.1 8.3 /a For 1970, a three-year centered average has been used. Lb Due to the substantial change in the structure of prices, the sectoral shares in GDP at current prices are significantly different in recent years. In 1976, these were: agriculture, 17.0 percent; industry, 35.1 percent (manufacturing: 13.5 percent); and services, 47.9 percent. On the effect of change in price structure, see Chapter 3, paras. 3.23-3.26. Source: Volume 4, Statistical Annex, Table 2B.1. Investment, Output and Employment 1.07 The data in Table 1.2 show an impressive overall growth performance of the Syrian economy over the long-term past, despite a highly erratic and low average growth of the agriculture sector (a long-term trend rate of growth of less than 2 percent per year is estimated for 1964-75; see Chapter 7, para. 7.05). In evaluating the performance of economic policies, however, it must be pointed out that while the overall growth rates achieved were not too far off the Plan targets (and in some cases even exceedled them), the sectoral composition of growth was often not similar to plan targets. Thus, despite the rapid acceleration in investment and the high overall growth rates which were achieved, the structural transformation of the -6 - economy did not proceed at the pace which the planners desired. In fact, with the possible exception of industry, the sectoral shares of investment bear little relation to sectoral shares of changes in either output or employment (see Table 1.3). Table 1.3: INVESTMENT, CHANGES IN OUTPUT, AND EMPLOYMENT CREATION, 1963-75 Period/- 1963-65 1966-69 1970-72 1973-75 Period Totals (in SL millions at 1963 prices) Investment /a 1,511.0 2,778.0 2,732.0 4,224.0 Changes in: GDP (fc) /b 230.9 1,200.5 793.5 1,842.4 Employment- c 164.0 622.1 161.7 116.3 Sector Shares (as percentage of total) Agriculture Investment /a 16.9 10.2 23.9 14.1 Changes in: Value Added (fc) /b -51.6 6.4 - 9.1 32n5 Employment /c ('000) 47.9* 101.4* 104.7 -11.0 Industry Investment /a 22.0 31.1 30.0 44.3 Changes in: Value Added (fc) /b 29.2 29.7 40.6 36.5 Employment /c 10.5* 0.1* - 3.3 39.2 Services Investment /a 61.1 58.7 46.1 41.1 Changes in: Value Added (fc) /b 122.4 63.9 68.5 31.0 Employment /c 42.3* - 1.7* - 1.4 71.1 /a In each period, investment is summed inclusive of both end years. /b Change in GDP (and sectoral value added) is calculated with one year forward lag: for example, for the period 1963-65, the Change in GDP is calculated as the difference between the 1966 and 1963 values. /c Change in employment is estimated (e.g., for 1963-65) by deducting employ- ment in the year prior to the initial year of the period (e.g., 1962) from the final year of the period (e.g., 1965); except for 1970-72, when the initial year value is deducted, because employment data for 1963-69 are not strictly comparable to 1970-75 data (see Volume 4, Statistical Annex, Table SA 1A.4, footnotes). * Asterisked numbers indicate an adding-up problem due to errors in original data. Source: Tables SA 1A.4, SA 2A.5 and SA 2B.1. (Note: Tables whose numbers start with SA are to be found in Volume 4, Statistical Annex.) - 7 - 1.08 Evaluation of economic performance in relation to targets -- beyond the comparison of growth rates, above -- is obscured both by the doubtful comparability of statistics, and by the absence of specific targets in the various plan documents (see Chapter 3). Bearing in mind the formidable data limitations, as well as the methodological limitations of Znalysis on the basis of aggregate ratios, incremental capital/output ratios (ICORs), and incremental capital/labor ratios (cost of additional job creation) are presented in Table 1.4, to allow an assessment of the impact of invesl:ments on output and employment. Several interesting facts emerge from these two tables. First, it is clear that the share of agriculture in investment has not been commensurate with its contribution to either output or employment. Despite low invtestments, however, agriculture has borne the brunt of employment creation from 1963 to 1972 (and particularly from 1966 to 1972, when virtually all new employment was generated in agriculture). 1/ In the light of this, it is remarkable that ICORs have been so low -- particularly for agriculture, where not only has labor-intensity increased, but also much of the investment has been of long gestation and has not yet had time to produce much output (e.g. Euphrates irrigation development). The data also show the capital- intensity of investment in industry (mining, manufacturing, electricity, gas and water), and the very slow creation of industrial employment, particularly during 1966-72. Finally, there is some evidence ( Chapter 3, Table 3.3) that ICORs have been substantially higher in public than in private mLanufac- turing, which suggests that public investment funds, for one reason cr another, have not been as effectively used as they might be. 1/ Unlike most other developing countries, Syria has been characterized by a relatively low unemployment rate since 1971 (below 5 percent); but this is a result of a high number of emigrant workers estimated currently be- tween 400,000 and 500,000 persons, whose remittances ($50 million in 1976) have not only eased the burden on the balance of payments, but have also reduced potential pressures on the budget for additional sub- sidies for basic commodities, costs of social and health services, and expenditures for employment-creation. - 8 - Table 1.4: INCREMENTAL CAPITAL/OUTPUT RATIOS, AND COSTS OF EMPLOYMENT CREATION, BY SECTORS, 1963-75 Period - 1963-65. 1966-69 1970-72 1973-75 ICORS /a Agriculture . 2.9 /b 2.0 /b 1.9 Industry 4.9 2.4 2.5 2.8 Services 3.3 2.1 2.3 3.2 Overall 6.5 2.3 3.4 2.4 Cost (in SL mlns. at 1963 prices) of Additional Job Creation: /a Agriculture 3,257 447 3,857 - Industry 19,302 . . 41,293 Services 13,300 . . 22,285 Overall 9,213 4,465 16,896 37,421 indicates that the ratio is undefined: the quotient or divisor was negative, or the divisor was close to zero. /a See notes to Table 1.3. /b Three-year averages have been used to smooth out the large fluctuations in agricultural value added. Source: Derived from Table 1.3. Fiscal and Monetary Policies 1.09 Fiscal and monetary policies over the 1960s and the 1970s have been characterized essentially by two basic factors -- government control of the economy and the defense effort (see Table 1.5).1/ Yet, the government was unable to adjust the resource mobilization effort to the increasing level of 1/ Defense expenditures in 1966 accounted for 7 percent of GDP and 48 per- cent of government tax and nontax receipts; in 1976, they increased to 15 percent of GDP, and rose well above government tax and nontax receipts. - 9 - public expenditures.1/ The slow growth of traditional revenues reflected the very high reliance on oil revenues and on profits from public enterprises, per se a very volatile element in any receipt structure. More specifically, the proportionate fall in tax revenues was the result of weak management of wealth and property taxes; inadequate adjustment of the tax base to infla- tion; excessive exemptions on import taxes -- especially for government purchases and turn-key projects; inadequate adjustment of the structure of indirect taxes on domestic production in response to the changes in the economic structure; heavy reliance on specific taxes, per se inelastic, to inflation in the absence of ad hoc measures to vary the rates or the basic price; inability to reduce evasion of income and profit taxes, aided by an inadequate system of tax administration; and the failure to capture, especially in more recent years, the capital gains on real property magnified by inflation which has made of it the preferred refuge investment.2/ In addition, the surpluses of public enterprises transfered to the budgel, were not commensurate with the heavy investments in public manufacturing, and consisted mainly of profits from petroleum ( Chapter 11, Table 11.4). 1/ Government receipts rose from 15 to 19 percent of GDP between 1966 and 1973 mostly as a result of the increase in the oil pipeline revenues: in fact, tax revenue during the same period only expanded from L1.6 to 12.3 of GDP. When oil transit revenue declined, government receipts followed suit and dropped to less than 12 percent of GDP in 1976. What is worse, tax revenue also declined from 12.3 to 10.8 percent. 2/ In figures, the performance of the government in raising revenues is translated into a level of public savings of 3 percent of GDP and an overall deficit of almost 19 percent in 1976. While one can easily accept the fact that, because of the defense effort, the central gov- ernment has been running a current deficit in recent years, it is also apparent that the non-defense current expenditure has been inadequate both in its social (educational and health) and economic (especially agriculture and communications) components. At the same time, public investment for basic infrastructure, especially low income housing and education, has been relatively neglected in favor of industry. _ 10 Table 1.5: SUMMARY PUBLIC FINANCES, 1966-76 Annual Averages (SLm) As % of GDP (mp) 1966 1968 1971 1973 1965 1968 1971 1973 -67 -70 -72 -76 -67 -70 -72 -76 A. Receipts /a 1,037 1,332 1,959 6,816 21.2 22.4 23.8 40.3 1. Tax Revenues 494 624 847 1,875 10.1 10.5 10.3 11.1 2. Nontax Revenues 185 291 379 452 3.8 4.9 4.6 2.7 3. Surplus of Enterprises 240 392 587 2,761 4.9 6.6 7.1 16.3 4. Transfers from Abroad /a 118 /b 25 146 1,728 2.4 0.4 1.8 10.2 B. Expenditures 1,199 1,772 2,496 7,455 24.5 29.8 30.2 44.0 1. Current: Defense 341 654 735 2,520 7.0 11.0 8.9 14.9 2. Current: Non-Defense 412 511 868 1,639 8.4 8.6 10.5 9.7 3. Investment 446 607 893 3,296 9.1 10.2 10.8 19.4 C. Deficit (& Financing) /a 162 440 537 639 3.3 7.4 6.4 3.7 1. Domestic Borrowing 147 377 410 490 2. Foreign Borrowing 132 100 273 495 3. Statistical Discrepancy /c -17 -37 -146 -346 /a Note that this is a non-standard presentation; for analytic reasons, current transfers from abroad (based on balance of payments data) are shown as part of government receipts, instead of the customary presentation as a financ- ing item. /b SL 62.8 million in 1966 and SL 173.2 million in 1967. /c Due to inconsistency between budgetary, banking, and balance of payments data. Source: Volume 4, Statistical Annex, Table 5.1, 3A.1, 3B.1 and 2B.4. 1.10 At the same time monetary policies played an entirely secondary role during the last two decades. The nationalization of the Banking system, the dependence of the Central Bank on the Ministry of Economy and Foreign Trade, which is also in charge of public enterprises, has put the whole banking structure in the role of the cashier for the Treasury. Furthermore, interest rates have not been used to allocate resources: credit being allo- cated through direct credit ceilings; or to mobilize savings, since interest rates have remained well below the inflation rates of recent years. - 11 - Trade Policies and the Balance of Payments 1.11 The services-dominated pattern of growth has led to increasing pressures on the balance of payments, as import growth, generated by growing aggregate demand, has outpaced the growth of export receipts. Until about 1972, however, austere economic policies (mainly, import restrictions) and slow growth in private consumption (and investment) expenditures had served to contain the growing trade gap to manageable levels, and a surplus in the services account (mainly oil transit dues) over the period as a whole, had served to contain the current account deficit to manageable proportions (see Table 1.6). With the relaxation of foreign trade restrictions in the early 1970s, the liberalization of economic policies in general, and the reconstruction efforts following the October 1973 War, aggregate demand (both private and public) accelerated sharply after 1972. Domestic supply inelas- ticities, however, led to both slow export growth and to increased recourse to imports, with the large and widening resource gap being financed by the receipt of transfer payments from Arab countries under the Rabat Agreement (1974) and the subsequent Riyadh/Cairo (1976) and other Agreements. This grant-financed increase in imports, and hence the trade gap, have led. to a disequilibrium in the balance of payments, which has come under severe pressures in recent years as grants have declined from their high 1974-76 levels. - 12 - Table 1.6: SUMMARY BALANCE OF PAYMENTS, 1963-76 /a Annual Averages (SLm) As % of GDP (mp) 1963- 1969- 1973- Est. 1963- 1969- 1973- Est. 68 72 75 1976 68 72 75 1976 1. Exports 660 928 2,573 4,141 14.0 12.8 17.9 16.8 2. Less: Imports -983 -1,690 -4,073 -8,826 /b -20.9 -23.3 -28.3 -35.8 /b 3. Services (Net) 223 489 391 - 44 4.8 6.7 2.7 0.2 4. Net Transfers 90 106 1,818 1,602 1.9 1.5 12.6 6.5 Current Account -10 -167 709 -3,127 -0.2 -2.3 4.9 -12.7 5. Private, ST Capital (net) 12 49 9 /c 280 0.2 0.7 0.0 1.1 6. Public, M+LT Capital (net) 32 /d 128 370 1,150 0.7 1.7 2.6 4.7 Change in Reserves /e -35 85 -694 1,904 -0.8 1.2 -4.8 7.7 Errors & Omissions If 1 -95 -394 - 207 0.1 -1.3 -2.7 -0.8 /a Data up to 1969 are official estimates (Volume 4, Table 3A.1) and are not strictly comparable, in some instances, to data beyond 1969, which have been adjusted (Volume 4, Table 3B.1). /b Includes SL 1,471 million of gold imports (equivalent to 6.0 percent of GDP). /c This figure conceals a net outflow of private capital of SL 103 million in 1973. /d Capital flow data prior to 1969 refer to commitments rather than disbursements. The average figure of SL 32 million conceals increasing net outflows of public capital during 1963-65 (average, SL 47 million), and the particularly large net inflow recorded in 1967 (SL 204 million). /e Minus indicates increase. /f Including SDR Allocations (average: SL 19 million for 1969-72). Source: Volume 4, Statistical Annex, Tables 3A.1, 3B.1 and 2B.4. The Third Five-Year Plan (1971-75) 1.12 The Third Five-Year Plan (1971-75) called for 8-percent real annual growth in GDP (5.2 percent in agriculture and 16 percent in industry); expansion and modernization of agriculture through investment in irrigation, particularly in the Euphrates basin; development and exploitation of the country's mineral resources (petroleum and phosphates); rapid expansion of manufacturing in light import-substitution industries and in resource-based industries such as textiles, cement and food processing; and for investments - 13 - in the country's physical and social infrastructure, The course of events, beginning with the 1973 October war, overtook the Plan's projections in the latter part of the Plan period. The 1973 petroleum price increase, whLich boosted Syria's petroleum export earnings, and the sharp rise in Arab grants following the October 1974 Rabat Agreement augmented financial resource availability in the short run, leading to revision of the Third Plan and sharp increases in public investments. 1.13. In the 1970s economic growth has suffered from the effects of the October 1973 war in the Middle East, the Lebanese civil war (1975-76), and associated events. 1/ The rising trend in output in the early 1970s was interrupted by a severe drought in 1973 and by the aftermath of the October war. In 1974 the Syrian economy had almost completely recovered from the dislocations caused by the war (though some of the facilities, like the petroleum-desulphurization plant at the Homs refinery, were still being repaired and did not start production until the end of 1975) and from the large drop in agricultural production brought about by the drought of late 1972 and 1973. 1.14 After the October 1973 war and the Rabat Agreement of October 1974, Syria's large receipts of Arab grants led to a sharp increase in public investment, and economic growth, which had been a scant 0.1 percent in 1973 and 1974, and was estimated at around 15 percent in 1975. The rate of eco- nomic growth has been uneven throughout the past five years due to exogenous factors cited, notably the 1973 drought and war with Israel and the impact of the Lebanese civil war of 1975-76. The average annual rate of growth in value added from 1970 through 1975 in industry 2/ (12 percent) outpaced that in agriculture (3.9 percent) 3/; with increases in the domestic price oE indus- trial goods relative to agricultural goods, the share of industry in GDP at current factor cost increased significantly (from 22 percent in 1970 to 37 percent in 1975), mostly at the expense of agriculture (whose share fell from 23 percent of GDP in 1970 to 19 percent in 1975). While the structure of production (and prices) was changing, the pattern of expenditure was also shifting towards capital formation rather than consumption; total investment increased from 15 percent of GDP in 1970 to around 30 percent in 1976. Pri- vate investment grew at a much faster rate than public investment in the last half of the Third Plan (1971-75) period, which is a reflection in part of the small base and in part of a somewhat greater acceptance of private sector activities by the Government. Although aggregate expenditure did not grow much faster than GDP from 1970 through 1975, net imports rose sharply, and accounted for a greater share of total available resources (almost 1.6 percent in 1976 compared to less than 6 percent in 1970). 1/ The term "economic growth" as used throughout this report, is equivalent to growth of GDP at constant market prices, except where noted otherwise. 2/ 7.4 percent in manufacturing. 3/ 2 percent, when adjusted for good and bad years. THE EMERGING FINANCIAL PROBLEM 1.15 In 1975-76, the intensification of the Lebanese civil war brought an increasing inflow of refugees, whose number in late 1976 was estimated at between 500,000 and 1 million (6 to 13 percent of Syria's estimated 7.9 mil- lion population). The conscious government decision to make no distinction between Syrian and Lebanese citizens resulted in considerable strain on government finances through increases in the cost of food and fuel subsidies and by increased demand for housing, education, health care and other public services. In early 1976, for both political and economic reasons, Iraq decided to redirect Kirkuk crude oil from the Mediterranean to the Gulf and, in 1977, to Dortyol (in Turkey). 1/ This has meant the loss to Syria of transit dues of $160 million a year, and the loss of crude oil at conces- sionary prices, which has necessitated imports of low-sulphur crude to meet domestic requirements at an additional cost of $130-$170 million per year. At the same time, following Syrian intervention in Lebanon, the flow of Rabat payments 2/ came to a halt some time in early 1976, due to Saudi and Kuwaiti pressure on Syria to mend fences with Egypt and to their feelings that Rabat payments should be tied to specific projects, in the interest of both the donors and Syria. The financial burden was also accentuated by Syria's military involvement in Lebanon. The cost of this involvement for the period June 1975 through October 1976, when some relief became available under the Riyadh/Cairo agreements, was estimated speculatively, in the press, at some $450-600 million over and above the defense allocations in the budget. In addition to these external factors, domestic factors such as stagnation in the growth of receipts from crude oil exports, weaknesses in tax administra- tion and collection, and the erosion of fiscal discipline in restraining both current and investment expenditures (with the consequent increase in import payments), have contributed to the increasingly severe pressures on the budget and the balance of payments pressures. Finally, the stabilization of mineral sector output at 1975 levels, helped to contribute to the decline in economic growth in 1976 to 7.5 percent. 1/ Both Iraqi and Saudi crude had been pumped across Syria through the former Iraq Petroleum Company (IPC) pipeline (nationalized by Syria in 1972), and the Trans-Arabian Pipeline (Tapline), respectively. The IPC pipeline carried Iraqi crude for export from Banias in Syria and Tripoli in Lebanon; the Tapline, Saudi crude, to Sidon in Lebanon. An agreement between Syria and Iraq (signed in January 1973) governed both transit dues and the price of oil deliveries to Syria for its domestic use; after the oil price increase of 1975, Iraq and Syria failed to reach agreement on new terms, and the agreement expired in December 1975. In April 1976, Iraq diverted the flow of oil away from Syria. 2/ Since the 1967 war in the Middle-East, the Arab League has met periodi- cally to decide the amount of annual aid to be provided by richer Arab countries to the front-line Arab states. At the October 1974 conference in Rabat, it was agreed that Syria would receive $570 million per year, for three years beginning 1975. - 15 - 1.16 In recent years, inflation has worsened the overall financial picture of the economy. In part it has been the result of the competition for available resources between the defense requirements and the investment effort. In part it has been the result of increasing prices oF imported goods, especially foodstuff. The latter has translated itself into ever increasing subsidies to maintain consumer prices of basic commodities practically unchanged. This was inevitable for obvious social and political reasons but unfortunately contributed to the expansion of the governrnent deficit and thus to inflation. At the same time, the level and composition of public investment has given rise to increasing financial requirements by the public sector which the banking system has accommodated by a very sub- stantial credit expansion. The sharp rise in public investment between 1973 and 1976, during which period the rate of public investment rose from 13 percent of GDP to 22 percent, contributed to the expansion of aggregate demand in the economy, and thereby to increased pressure on resources. 1.17. According to preliminary official estimates, the overall budget deficit in 1976 is expected to amount to more than SL 4.3 billion (equivalent to more than $1.1 billion) as follows (in SL billions): Est. 1973 1974 1975 1976 Domestic Revenues 2.7 4.3 6.6 7.0 Current Expenditures 2.2 3.2 5.2 6.1 Development Expenditures 1.1 2.4 4.5 5.2 Budget Deficit 0.6 1.3 3.1 4.3 Source: Volume 4, Statistical Annex, Table 5A.1. The growing budget deficit led to increasing recourse to domestic and external borrowing, including short-term domestic public borrowing (in the absence of a capital market, exclusively from the banking system), which created substantial inflationary pressure in 1975 and 1976. Although the wholesale price index, which reflects extensive price controls, rose by only 7 percent in 1975 (the latest year for which data are available), it is thought that actual inflation may have been around 20 percent (judging by the GDP deflator). In 1976, the rate of inflation is estimated to have declined to around 15 percent, as excess-demand pressure abated from its previous level; a further slowdown may be expected in 1977. 1.18 In 1976, the current account of the balance of payments was in deficit of about SL 3.1 billion ($795 million), for the first time since 1972, compared to surpluses of SL 1.3 billion ($331 million) in 1973, SL 580 million ($156 million) in 1974, and SL 290 million ($76 million) in 1975. The 1976 current account deficit has been financed by drawing down reserves by SL 1.9 billion. As of December 1976, gross foreign exchange reserves were estimated - 16 - at US$502 million (net $119 million), equivalent to 2.7 months of estimated 1976 imports. The worsening balance of payments reflected a steep rise in import payments in the wake of the sharp increases in public development expenditures; the growth of tourism expenditures; the loss of oil pipeline transit dues; the decline in workers' remittances from Lebanon, and the drop in unrequited transfers. Public transfers (grants) in particular fell to SL 1,600 million ($410 million) in 1976 from a peak of SL 2.4 billion ($650 million) in 1975. Net capital inflows were estimated to have increased in 1976 to SL 1,430 million ($367 million) from SL 716 million ($193 million) in 1975 and SL 332 million ($89 million) in 1974. However, the terms of the debt contracted were slightly more adverse, with both shorter maturities and higher interest rates. As a result, the debt service ratio 1/, which was 6.8 percent in 1974, was estimated to have increased to 9.5 percent in 1976. IMMEDIATE AND LONG-RUN POLICY CHALLENGES 1.19 The Fourth Five-year Plan (1976-80), reflecting initial overoptimism on the part of the government concerning the future availability of financial resources, called for a five-year investment program (including estimated private investment) of SL 54.1 billion ($13.7 billion). The Plan was to have been approved in final form by the end of 1975, but as a result of adverse financial developments rooted in the high investment rates of 1974-75 and the external developments already cited, approval of the Fourth Plan was delayed until April 1977. The approval of the Plan was mainly an administrative and legislative formality, and shortly after its approval the Government, in response to the financial stringency, confined the public sector investment program to only the ongoing projects, which were estimated to require about SL 27 billion for completion. However, some new projects were started in 1976 and early 1977, which could add as much as SL 8 billion during 1976-80. Strengthening Economic Management 1.20 In response to the financial stringency, the Government is actively seeking to reassemble the structure of economic planning which had fallen into disuse in the brief post-1973 period of financial ease. The first priority of public efforts is to ensure that scarce public funds are spent only on those projects which are economically and socially profitable. Project selection, of course, is only one among many reforms needed to revamp the system of public economic management and administration. The absence of sound adminis- trative and planning institutions is perhaps the most serious impediment to economic development in Syria. While this is a task for long-term effort, a start must be made as early as possible. Restoring Macroeconomic Equilibrium 1.21 The decision to curtail public public investment reflected the gov- ernment's growing concern at the emerging financial problems of the economy. 1/ The ratio of amortization and interest payments on external debt, to exports of goods and nonfactor services. 17 - The discussion above summarized the nature of economic growth in Syria, in which the growth of "commodity-producing" sectors lagged behind, with the result that neither the tax base nor the export capacity of the economy grew as fast as s3a-regate demand. In recent years, these factors have been supple- mented by the additional problems of a political nature, which have further altered the pattern of resource usage and availability (see Table 1.7). The table shows the rapid growth in aggregate demand, particularly during 1973-76, when transfer receipts from abroad averaged over 10 percent of GDP. As a result, the budget deficit, which had been of the order of 5 to 8 percent of GDP during 1965 to 1972, widened to some 14 percent of GDP during 1973-76 (18 percent in 1976); at the same time, as imports rose to average some 37 percent of GDP in this period, the resource gap also widened (to 19 percent of GDP in 1976), leading to large recourse to external borrowing. Since prospects for export growth are limited, the first priority of economic policy should be to correct the disequilibrium in the balance of payments, through recourse, perhaps primarily, to a reduction in the investment program, and also to both exchange/trade policies and fiscal policies (see Chapter 11 on why monetary policy is likely to be ineffective). 18 Table 1.7: AVAILABILITY AND USE OF RESOURCES, 1963-76 Structure (% of GDP) /a Growth (% per year) /b 1963- 1968- 1973- 1963- 1968- 1972- 67 72 76 68 72 76 GNP (mp) 101.0 101.7 100.7 3.7 8.5 4.8 Imports (g&nfs) 22.3 25.4 36.7 5.5 10.2 19.3 Less: Exports (g&nfs) 20.0 20.1 23.8 0.7 6.0 0.3 Less: Net Factor Income 1.0 1.7 0.7 29.5 17.9 -44.4 Aggregate Supply/Dema'nd 102.3 105.3 112.9 4.5 8.5 10.6 Consumption 88.7 85.8 86.6 5.1 3.9 12.9 Private (73.3) (67.5) (64.5) ( 3.5) ( 3.5) (11.8) Public (15.4) (18.3) (22.1) ( 11.9) ( 5.4) (16.2) Investment /c 13.6 19.5 26.3 0.8 34.8 2.5 Private /c ( 5.8) ( 6.2) ( 9.6) (-10.4) (22.1) ( 9.5) Public /c ( 5.8) ( 9.9) (16.7) ( 23.5) ( 7.8) (17.5) Memorandum Items: GDP(mp) in SL mlns. 4,606 6,854 16,975 3.5 8.3 5.4 Implicit GDP Deflator (1963 = 100) 107.1 112.3 238.7 2.0 6.0 21.8 Domestic Saving 11.4 14.2 13.4 Private /d .. 12.3 13.2 Public /d .. 2.5 0.6 Government Revenues .. 2.2 3.0 Net Transfers from Abroad 2.1 1.4 10.4 Indicates: not available. /a Annual averages at current market prices. lb Average compound annual growth from initial year to final year, based on the constant (1963) price series. /c Gross fixed investment. Does not add up: the residual being changes in stocks. /d Public savings are defined as the balance on the current account of the budget; private savings are derived residually. Source: Volume 4, Statistical Annex, Tables 2B.3 and 2B.4; and 2B.6, 5.1, 3A.1, and 3B.1. - 19 - 1.22 The restoration of macroeconomic equilibrium is likely to be achieved only in the medium-term, even if short-term measures (like curtailing public investment) are applied along with longer-term measures (like export promotion, fiscal reform, pricing and incentive policies). It is importarn therefore, that government policies designed to address this problem be synchronized with the adoption of long-term economic development policies, which are also needed to place the country's development effort on a sound footing. Developing a Strategy for the 1980s 1.23 In determining a development strategy, the government is confronted with the need to find an appropriate balance between long-gestation projects aimed at structural diversification of the economy (which is crucial 1:o long- term development) and quick-yielding projects in the treditional sectors which respond to the short-run financial stringency. The strategy underlying the Fourth Plan places particular emphasis on industrialization, but investment in agriculture would also remain substantial. In contrast, investment in physical and social infrastructure has declined in relative shares. The investment program for manufacturing industry alone would account for as much as 20 per- cent of the Plan's overall investment outlay. The industrial development strategy stresses import substitution (replacement of imports) in consumer goods, and a substantial expansion of resource-based industries, such as cotton textiles, cement and fertilizers. Significant export of manufac- tured goods -- particularly textiles and fertilizers -- by 1980 is a primary objective of the government's investment program in the manufac- turing sector. 1.24 In agriculture, the government's overall objectives remain the same as those in the previous Plan: self-sufficiency in major domestic food needs, meeting the raw material requirements of industry, and provision of a produc- tion surplus for export, but the 8 percent target for average annual growth is higher than the 5.2 percent adopted in the previous Plan. Rational land and water use, stabilization of annual fluctuations in output and improvement of consumer diet through an increase in protein supply are further objectives. The government's strategy to achieve these objectives includes expansion of irrigated agriculture, intensification of crop production and achievement of better balance and complementarity between crop and livestock production. A significant change in government strategy in the agricultural sector is that large-scale public sector production units will play a less important role in future, and increased emphasis will be given to investment in the private sector. 1.25 In addition to the concern for sectoral balance, the government must devise a comprehensive development strategy designed to meet well-defined objectives in the light of assessed constraints. Clearly, there is a need to pursue policies designed to place the economy on a path of rapid self- sustaining growth, with adequate regard for income distribution, subject to the maintenance of acceptable macroeconomic balance. Agriculture must receive priority attention in the development effort, if it is not to become a con- straint to future growth. At the same time, the burden of employment generation must be increasingly shifted to industry, which is not without - 20 - implications for the pattern of industrial growth (emphasizing export- orientation, reduced capital intensity, and organizational reform of public enterprises). In the past, Syria has gained from emigration to neighboring Arab countries (and to some extent from low labor force participation rate among females) so that the burden of job creation has been alleviated. There is a need in the future to define an employment policy; concomittantly, the government must give due attention to income distribution and social welfare. - 1 - CHAPTER 2 PUBLIC ADMINISTRATION AND DEVELOPMENT PLANNING STRUCTURE 2.01 Since the attainment of independence in 1946, Syria has had several changes in regime which resulted in a shift of power from groups of landowners, traders and industrialists to a rising class of officers, technicians and civil servants, as well as in a shift of the economy from an essentially laissez-faire system to one that is largely publicly owned and regulated. 1/ The Ba'ath Socialist Party -- the ruling party since 1963 -- has provided substantial continuity of emphasis on economic and social development poli- cies which have, by and large, continued to prevail in spite of internal government changes and tensions within the Middle East. During the 1960s land was redistributed to large numbers of formerly landless peasants, under the agrarian reform program. In November 1970 General Hafez Assad became President of the Republic and his regime has since been characterized by a balance of firmness and conciliation in domestic policies; by economic. prag- matism; and by a concerted search both for a better-defined role for the private sector in the centrally regulated economy and for diversification in foreign economic relations. All these aims have been pursued gradually and cautiously; in spite of recent events in the Middle East, substant:ial reorientation of economic policies and some diversification of production has been achieved. THE ADMINISTRATIVE SYSTEM 2.02 New nations never begin their independent life with a clean slate. The administrative structure and process of earlier times and the values and patterns of behavior of past regimes form the base on which new systems are overlaid. Excessive centralization has deep historical roots in Syria, and I/ All mineral deposits are exploited by state-run enterprises and except for small workshops employing up to ten people all industrial establish- ments are government-owned. The state owns and controls the foreign trade corporation; public enterprises also handle the marketing of cotton and cereals. The banking system is state-owned and controlled by the Ministry of Economy and Foreign Trade. Agriculture is still largely private but the government exercises a strong influence in this sector by the redistribution of expropriated land through cooperative societies, state farms, and publicly owned marketing and credit institutions, and of course, through the control of pricing and other incentives. Small- scale activities left to private enterprise include small-scale industry; crafts; some retail trade; commercial trucking and taxi transport; con- struction and housing, and a variety of services but these are subject to an elaborate system of price controls, licenses and other regulations. This chapter draws upon the work of Mr. Richard W. Gable (Consultant). family and social structures have reinforced the strong authoritarian inclina- tions of the leadership. For centuries, in the Middle East, bureaucrats were the personal representatives of the ruler. Their main tasks were to collect taxes and to maintain law and order. As their numbers swelled those remote from the center could give free rein to their own authoritarian tenden- cies while concealing their behavior from the central authorities. 2.03 The lack of effective civil authority and the general insecurity of life promoted the development of rigid customs and strong leadership through- out the society. During the Ottoman period, religious and other leaders of primary and traditional groups carried much of the burden of government. The society has remained strongly personalistic; loyalty is directed to family or village, lineage or region, city or sect. Status is ascribed to the individual on the basis of family or other group background, rather than earned by personal or professional achievement. 2.04 The consequences for administration are profound. While the effects of religion have declined in importance to the point "where one can affirm today that there has ceased to be anything particularly Islamic in the secular administration of Eastern Mediterranean countries" 1/ the continued demands of ascriptive group loyalties clash with efforts to create more impersonal and universal patterns of responsibility and behavior. Under the Mandate (1920- 1946) the French attempted to create a framework of values and procedures for less personalistic behavior by introducing a universalistic legal and judicial system, assuring greater personal security, and rationalizing administration. However, most agencies were administered directly by the French so that Syrians did not develop the managerial skills or capabilities needed to administer their government, and at the end of the Mandate, the country did not have a unified administrative system. Damascus and Aleppo (minus Alexandretta), although separate states for a few years, were combined during most of the period; but Jebel Druze and Lattakia had some degree of autonomy from Syria throughout the Mandate. Furthermore, the development of a national civil service was limited by the dual structure of the Mandate: nationwide functions were handled centrally by the French High Commissioner, while local functions were administered in the states primarily by Syrians and granted very limited authority. Procedures within and between the two systems were slow and cumber- some. Standards of recruitment and training for the public service remained low and the requisites for a professional civil service were lacking. Educa- tional resources were inadequate to prepare civil servants and dedication to I/ Hardy W. Wickwar, Modernization of Administration in the Near East (Beirut: Khayats, 1962), p. xi. - 23 - public service was weak. At most, a public job provided an implied tenure and a retirement pension. 1/ Patterns of Authority and Decision-Making 2.05 After independence the laws establishing the administrative system gave ministers and secretaries-general broad powers so that decision-making was tightly concentrated at the top of the hierarchy. The authority and responsibility of subordinates were vaguely defined, reinforcing the deter- mination to maintain a firmly controlled, highly centralized system, a pattern that is in keeping with historical precedents. All but procedural matters are dealt with at the highest levels, and even these day-to-day issues of admin- istration may surface at or near the top. 2.06 Executives are reluctant to delegate; they are personally responsible for their actions, so they jealously guard their authority. Subordinates are reluctant to accept responsibility because they lack experience or colapetence or because of the insecurity they feel in a system of fragmented loya:Lties. Thus, both executives and subordinates fear to risk the consequences of down- ward movement of authority. 2.07 Elaborate procedures and excessive paperwork are devised to protect against arbitrary and inconsistent administrative behavior. They are designed to protect both officials and citizens, providing control in a system in which administrative skills and experience are limited and the temptation to do wrong is great. For example, an Economic Sanctions Law deals with all acts that impair and harm operations of production, distribution, and exchange. The law is so arbitrary that minor executives pass all decisions up to their superiors, who then call a board meeting to decide routine questions to assure a wide sharing of responsibility. General managers of public enterprises com- monly implement decisions made at higher levels; these are often decisions specific to the case rather than general guidelines. They are sometimes inconsistent with one another, because they are made on an ad hoc basis at a level remote from operations. The Economic Committee of the Cabinet may usurp the authority of the Minister of Industry and make decisions within public enterprises themselves. All contracts of more than one million Syrian pounds must be approved at the cabinet level, leading to a multiplication of smaller contracts to avoid this review. 1/ For a full account of this administrative history, see Ralph Earl Crow, The Civil Service of Independent Syria: 1945-1958, (Ph.D. dissertation, Ann Arbor, University of Michigan, 1964) pp. 49-59, and Hardy W. Wickwar, Modernization of Administration in the Near East, (Beirut: Khayats, 1962), p. xi. - 24 - 2.08 Written forms, detailed records, and elaborate procedures accompany the process of pushing (or pulling) decisions to higher echelons. The con- sequence is usually delay, but not necessarily better decisions. Subordinates lack experience in administrative decision-making; hence the information they forward is not prepared in such a way that sound decisions can be made. With- out appropriate data higher echelons are unable to weigh alternative choices other than political ones. Key executives are aware of the need for better information systems, rationalized procedures, and more orderly, data-based decisions, but so many development decisions are matters of political prior- ity that new methods receive limited support from the political leadership. Decision-making is adversely affected by the excessive preoccupation with minutiae at the upper levels. Gresham's law of bureaucracy is evident: the cheap work drives out the dear work, so that executives and political leaders have less time for essential policy planning and formulation. 2.09 Although the administrative system is authoritarian, it is not a totally closed system. Lineage or other group ties provide entry. It is not atypical for a citizen having a complaint or need for assistance to seek a person in authority, possibly someone in the same family or from the same vil- lage or religious/ethnic group. Having entered the system, the matter fre- quently moves to the top for resolution, adding to congestion within the sys- tem and further slowing routine action. If the initial contact is made with a person who is not the agency which normally handles such matters, it must be referred across agency lines, confusing and additionally disrupting formal procedures. 2.10 In view of the centralization which prevails, it is generally being recognized that there is a need to develop supervisory and managerial skills at lower levels. The role of the supervisor needs to be given further re- cognition in government ministries or public enterprises, and effort should be made to develop and train foremen and supervisors. Effective leadership at lower levels has direct impact on productivty. More attention needs to be given to discipline, motivation and the promotion of employee satisfac- tion. Administrative Structure 2.11 The division of work among the traditional government ministries is conventional; each is organized in typical hierarchical pattern with authority pyramiding to the minister. Field operations are tightly controlled from the center, as are provincial, municipal, and local units of administration, al- though efforts are now being made to devolve more authority to local units. 2.12 Initially, eight ministries were established-in 1946 (Finance, Defense, Foreign Affairs, Interior, Justice, National Economy, Education, and Public Works) and a very few agencies were attached to these ministries. The Ministry of Finance was the first to complete its organizational structure; it served as a model for the rest. In time some autonomous agencies became separate ministries and, as economic development progressed, especially after nationalization, many new ministries and autonomous agencies for intervention in the economy were created (see Figure 2.1). - 25 - FIGURE 2.1: Organization of the Executive Branch, 1977 | President | of the Republic The Presidency Legal Polit . I Economic Bureau Bureaj Bureau Central Orgamiation ._ I | | ~~~~~~~~~~~~~ ~~Prime Mvinister _ or Inspect,on l l & Con~~~~~~~~~~~trol Office of the Cntral Organ,zat"on Prime Minister _ or Financial CetaControl Burear Supreme Council Supreme CouncilI Planning of for Euphrates Council Ministers |Dam Projects Central State Secretarnal Bureau Planning t h of Statistics Commission MINISTERS OF STATE FOR. Council Df Ministers Affairs l Committee § ; Prices oForeign Affairs s l Committee ~~~~~~~~~~~~~~~~~~~~~~~~~~~~l_ anning Presidential Affairs Wlthout Portfolio 14i Deputy Prime Deputy Prime | Deutv Prime Vnister for Minister for SiMinister for Sal, Cultural, Economic Affairs . Foreign Affairs & Organizational | Affairs Ministry of ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Minist'y of itr Ministry of Minitry of Ministry of Cult ure & Agrarian Reform Communications Foreign Affairs AL-AWIKAF National Guidarcin Ministryof Ministry of oF Economy & Mlctinistry Ministry Educa.,tiyon Foreign Trade Electricity Defence E,n Ministry of Mnistry of Ministry of Minittry of Finance te uEaprtes Interior Hne Min istry of Ministry of Housing & Ministry ofMistyo Industry Public Utilities Justice Higher Educat;on Ministry of Ministry of Ministry of Public Works & Petroleum & 11. LocalMistyo Water Resources Mineral Resources Administration | n Minnistry of Ministry of Supply & Ministry ofi f Internal Trade Tourism Socia Affairs Ministry of Transport Line of Authority Wo-ld Bank - 17769 - - - - Chairmanship of Collective Bodies - 26 - 2.13 The Public Enterprises are organized under Legislative Decree No. 18. A public enterprise is an organization engaged in agricultural, industrial, commercial, or financial activity as a financially and administra- tively independent unit. It is headed by a general manager who is responsible to a General Organization (formerly called Union), a governmental holding company for a group of enterprises having similar or integral purposes. The General Organization is also a legal entity, financially and administratively independent, having the authority to coordinate the various public enterprises responsible to it. In turn, each General Organization is attached to a Ministry, such as Industry, Agriculture, or Petroleum and Mineral Resources (see Figure 2.2). 2.14 The general manager of an enterprise is not always selected on the basis of experience and competence. He is responsible for managing the company in cooperation with an administrative committee consisting of four assistant managers and two workers designated by the union; the general manager serves as chairman. The committee is supposed to prepare the annual plan, establish execution plans, suggest performance norms and rates, and coordinate the various units of the company, but the general manager of the General Organiza- tion, or higher authorities, frequently intervene in company management. The General Organization allocates capital to public enterprises, which have independent borrowing power. 2.15 A General Organization is governed by a board of directors and a general manager appointed by decree. The Board consists of the general manager as chairman, five assistant managers in the General Organization, and a repre- sentative of the workers designated by the union. The board has general plan- ning and policy responsibility over all public enterprises in its jurisdiction and approves the annual plans and budgets of the General Organization and its constituent enterprises. The general manager directs the General Organization and supervises the work of its public enterprises. The investment funds which the General Organizations allocate to enterprises are budgeted by the respec- tive ministries. General Organizations also have borrowing authority and receive the net profits of companies for further allocation. 2.16 The General Organizations provide a means of concentrating authority at a higher level, ostensibly to assure policy coordination and control and to provide stimulus for creativity and innovation. In fact, the managerial leadership which is provided from higher levels is little better than that found in the public enterprises, where technical and administrative skills are in short supply, rational planning is rare, accounting and managerial practices are archaic or ill-suited to a developing enterprise, and productivity is low. The tendency to move authority to levels remote from operations produces uninformed decisions and discourages the development of needed managerial talent. The inevitable confusion over the proper division of responsibility among the public enterprise, the General Organization and the Ministry is usually resolved by moving the question to the higher authority. Moreover, insufficient incentive is offered to encourage effective performance and expanded productivity at the operating level. - 27 - FIGURE 22: Selected Agricultural and Industrial General Organizations and Public Enterprises, 1977 Prime minister Economi y and Ministry of Agriculture Foreign Trade and Agrarian Reform I General Organization - 1/ Public Authority for Cereals General for Food Processing Enterprises and Flour Mills for Cattle General General Organization 3 b Plic Authority for Cotton Organization For Sugar Enterprses Ginning & Marketing for Fishery =f f lThe General | Organization - _ 13 Pubi c Tobacco Organization | For Tetiles Enterprises Monopoly for Fodder General 1/9Pb h uhae /General F Organizat;on 1 /L The Euphrates 2/ _ Organization For Chemicals Enterprises l Companyfore forgPoultry j~~~emcas ___________________ ~~~~~~~~the Manufacture for Poultry of Tractors & Mechanical | General 1/ Products _ Organization For Cement 23 Publ ic | _ Enterprises | Structure of a typical General ; l General Organization Organization for Engineering Chairman Board of Dirctors 1. Esrtablished by Legislative Decree No. 18 of 1974. 2. Established by Special Legislative Decree of 1969. 3. The General Manager serves as Chairman of the Board of Directors except when project and budget decisions are wnder discussion, when the Minister of Industry serves as Chairman. I GeneralI Manager [ GENERAL MANAGER B IAdministrative Committees Public |General Manager,, | Enterprises |4 Enterprise Managers, | |arid 2 Workersl World Bank -17770 - 28 - Administrative Reform 2.17 A common fallacy is the assumption that a nation with a less devel- oped economy has a simple, less developed administrative system. Indeed, in many cases the administrative system is exceedingly complex and elaborate, being a mix of old practices, never rationalized or integrated to serve contemporary needs. Administrative capability is often the most important ingredient in the successful achievement of new policy goals; but slight attention is often given to that requirement. Policy and politics tend to dominate the stage so that administration is ignored, or becomes politicized in its turn. In either case, the capability for implementation suffers. 2.18 Increasing numbers of political and administrative leaders in Syria are coming to recognize the urgent need for administrative reform. At the present time the principal responsibility for administrative improvement rests with a small (eight person) Organization and Management Directorate located in the Prime Minister's Office. In cooperation with the Arab Organization for Administrative Sciences, created by the Arab League with headquarters in Cairo, the Directorate is conducting studies of administrative performance in several ministries. Specific functions and activities are being analyzed to determine how they are performed, what time and cost they consume, and how they may be improved. In one example, investigation revealed that the process of granting a simple request for leave took twenty-three days. Ordinary project decisions in economic development ministries take three months. The directorate hopes to be able to formulate performance guidelines which will speed and improve decisions. 2.19 The first and most important step in any program of administrative reorganization and reform is for the political and administrative leadership to recognize the need for change. A strong impetus for reform was given by the Prime Minister in a policy statement approved by the People's Council on October 12, 1976. To improve administration, coordination, and control, he proposed that the government: (i) Review and improve administrative systems in the ministries; (ii) Review work methods for the purpose of reorganizing the tasks and functions and providing the necessary climate to raise productivity; (iii) Strengthen the ability of the Central Organization for Inspec- tion and Control to monitor public projects in the plan. An objective of the Fourth Plan is to improve the general administrative system by raising standards of service which it rendera the population at the least cost and trouble. Beyond the expression of this aspiration, no opera- tional steps are specified and no investment is projected for administrative reform activities. Awareness of a critical need for such reform is growing. The Prime Minister's directive, also containing proposals related to the public service (discussed below, and in greater detail in Appendix 2A to this Chapter), provides a solid base on which to build a much-needed program of reform. THE PUBLIC SERVICE 2.20 A major constraint to effective administration is the lack of an effective civil service. Appendix 2A to this chapter provides backgrolnd information - the public service, To summarize its conclusions, in brief, the Government of Syria is operating under personnel legislation which was designed by a foreign power and is inadequate and inappropriate for contem- porary development needs. It lacks a modern uniform personnel law and a central personnel agency which can provide guidance in the development and implementation of needed personnel reform. There is a shortage of qualified technicians and administrators, and those qualified are over-worked. Many good people go on foreign assignments or leave government. Salaries are low; work incentives are weak. A strong start has been made in training personnel in limited areas but much more is essential. THE PLANNING PROCESS 2.21 The capacities of the public service, and of administrative institu- tions in general, profoundly affect the planning capacities of the government. Syria began to plan its economy toward the end of the 1950s. During t:he United Arab Republic (UAR, 1958-1961), a separate Ministry of Planning for Syria was established in 1959, succeeding the joint ministry used for both members in 1958. The First Five-Year Plan 1961-1965 was prepared usilng con- cepts and techniques borrowed from Egypt. The plan was not actively pursued after dissolution of the UAR in 1961. When the Ba'ath Party assumed power in 1963 socialist ideology was reinstituted and a strong thrust was made toward development planning. The Supreme Planning Council was established in 1963 over the Ministry of Planning, which became its secretariat. After the nationalizations of 1964 and 1965, the government with assistance from the East German experts prepared the Second Five-Year Plan 1966-1970. By 1968 the planning machinery which is in use today took form and was used to prepare and implement the Third Five-Year Plan 1971-1975. Completion of the Fourth Five-Year Plan draft for 1976-1980 encountered difficulties during 1976; its enactment was delayed until early 1977, a year late (see Chapter 13, Towards a Development Strategy). Planning Machinery 2.22 The official machinery for development planning today consists of the Supreme Planning Council, the State Planning Commission (successor to the Ministry of Planning), and the Central Bureau of Statistics (as shown in Figure 2.1, Organization of the Executive Branch, above). The Suprerne Plan- ning Council, headed by the Prime Minister, is composed of ministers and agency heads holding portfolios which deal with economic matters (for example, Finance, Supply, Petroleum, Transport, Communications, Economy and Foreign Trade). As the top policymaking body for economic development, the Supreme Planning Council formulates the economic and social goals of the nation, designs the institutions which will carry out these objectives, and allocates resources for implementing them. It supervises the execution of plans and evaluates their accomplishment, taking necessary action to design, finance, 30 and execute development projects. Its decisions are binding on all govern- mental agencies and public enterprises. Day-to-day decisions required to implement the plan are made by the Economic Committee, an interministerial subcommittee of the Council of Ministers. Many of the same people serve on the Council of Ministers, the Supreme Planning Council, and the Economic Committee. 2.23 The State Planning Commission (SPC), headed by the Minister of State for Planning Affairs, is attached to the Prime Minister's Office. It provides information-gathering and data-analysis services for the Supreme Planning Council. In 1976 the SPC was reorganized and expanded to strengthen its ability to focus more sharply on policy issues and alternatives (see Figure 2.3). In the future the Council intends to rely more heavily on the SPC for long-range planning, project identification and design, feasibility studies, financial and economic planning, and project evaluation. A team of experts is being assembled by the UNDP to assist the SPC in meeting its responsibili- ties. 2.24 The Central Bureau of Statistics (CBS) is also attached to the Prime Minister's Office. It too has been reorganized for the purpose of improving its capacity to provide the statistical base for the work of the total plan- ning machinery. The CBS now has statistical sections in several ministries and its data is gathered in rural areas by offices scattered throughout the provinces. Plan Formulation 2.25 There are three broad approaches to development planning: planning from the top down -- by which a central body formulates goals and policies, possibly using a macroeconomic approach and quantitative models; planning from the bottom up -- by which the the central planning agency assembles and reviews the investment proposals of ministries, public enterprises, and local governments and then allocates resources on the basis of centrally determined economic priorities; and mixed, using a combination of the two approaches. In Syria, plan formulation is from the top down, but implementation has taken place from the bottom up, substantially altering the plan as formulated so that finally the approach is mixed. Planning from the top down is in keeping with the tradition of a highly centralized government. Furthermore, since 1963 the influence of the Ba'ath Party has been strongly felt at the highest decision-making levels. The broad objectives of each plan are identified by the party and communicated to the Supreme Planning Council through the Prime Minister. 2.26 The plans formulated by the Supreme Planning Council do not enun- ciate a strategy of development. They tend to be very general, lacking detailed specification. Until recently the research and analysis by the economic planners has been utilized late in the formulation process. The reorganization of the SPC and CBS and the expressed determination to employ their services may improve planning in the future. However, even when sound, feasible goals are enunciated, the process of implementation may jeopardize - 31 - FIGURE 2.3: Internal Organization of the State Planning Commission, 1977 Minister of State for Planning Affairs Adviser with Deputy Minister Deputy Minister or Deputy Minister for General Planning Responsibilities Sectoral Planning l ~~~~~~~~~~~~~~Directorate of Planning for Directorate of General E Directorate of PlnigfrDrcoaE firrigation Planning Economic, Scientific, and and Agriculture _ _ _ _ _ J ~~~~~~~~~~Technical AffairsJ_ _ Directorate of Manpower Directorate of Financial, Directorate of Industrial Planning and Higher and Legal, and Administrative Pann Technical Education Affairs Directorate of Building Public Relations 1 Directorate of Transport and Construction _ and Commriunications Directorage of Financial Local Office of Directoe of Regionalr| and Monetary Planning VWorld Food Programme Planningd Services Directorate of Research and Project Evaluation (to be activated in 1978) World Bank - 17771 - 32- their attainment. Plan formulation and implementation should be two sides of the same coin, but they have been insufficiently integrated in Syria. Development Project Administration 2.27 Projects are the "cutting edge" of development. As the critical leverage point, they translate plans into action. Hirschman explained, "the development project is a special kind of investment ... (that) connotes purposefulness, some minimum size, a specific location, the introduction of something qualitatively new, and the expectation that a sequence of further development moves will be set in motion." 1/ Projects are not supposed to be designed as ends in themselves but are identifiable units which will presum- ably achieve larger development goals. 2.28 The actual planning process in Syria provides little concrete guid- ance to project planning and implementation. The formal process which is normally prescribed for well-planned project administration consists of a number of integrated steps: project identification, formulation and prefeas- ibility analysis, design, appraisal, selection and approval, implementation, supervision, and evaluation. The reality in Syria, as in most developing countries reveals a serious gap between the prescribed procedures and the actual behavior at each stage of the project cycle. 2.29 Project identification in Syria involves a mixture of formal and informal processes. Targets are set in the plan. A General Organization, communicating through the ministry to which it is attached, may propose to the Supreme Planning Council an investment project to close a gap between existing capacity and a plan target. The minister himself, or the Supreme Planning Council, may also make this determination. Some projects simply emerge out of the commitments of political leaders with little reference to plan goals. Fundamental problems have been the lack of effective project administration techniques and the ill-equipped and small staffs of the SPC, the ministries, and the General Organizations. 2.30 During 1974 and 1975 many projects were designed without prefeasi- bility study and contracts were negotiated and approved without feasibility analyses, other than those which contractors conducted. In 1976, the Council of Ministers and the Supreme Planning Council imposed the requirement that prefeasibility and feasibility studies must be conducted before any new projects may be approved and contracts concluded. This requirement will have long-run benefits, but little immediate impact. Existing contracts which were not based on feasibility studies cannot be broken and no new projects are to be inaugurated under the Fourth Plan. 2.31 Project implementation (operation, supervision, coordination, and control) is hampered by deficiencies in reporting and monitoring systems, 1/ Albert 0. Hirschman, Development Projects Observed (Washington D.C.: Brookings Institution, 1967), p. 1. - 33 - outdated or inadequate accounting and auditing procedures, faulty evaluation of contractor performance, and untrained personnel. The selection and place- ment of project managers typically involves political rather than performance consideratio- and negligible attention is given to the need for training managers, except in very limited areas. A system of feedback, by which proj- ect progress may be constantly adjusted, has not yet been devised. Evraluation of project results could lay the basis for future projects by providing guid- ance to avoid past mistakes and build on successes; but systematic evaluation has seldom been done. The techniques are lacking or are not built into the project and the determination to conduct such reviews is sometimes weak. More attention is given to simply recording financial losses than to analyzing problems in project administration and identifying methods of improving the process in the future. Conclusions 2.32 Development plans have been prepared by an informal process which has not made the best use of the available machinery. Essential information has not always been sought or utilized. As a result plans have lacked a sound strategy, priorities have not been clearly identified, and operational guide- lines have not been specified. Informal processes have permeated plan imple- mentation too. Projects have been designed and contracts signed without extensive prior study, execution procedures have been faulty, and final eval- uation has been minimal. Throughout the process there has been a shortage of qualified personnel and the most competent persons are overworked. The re- organization of the State Planning Commission and Central Bureau of Statistics may help if the determination for reform does not slacken, but further and con- tinuous improvement will be needed. THE BUDGET PROCESS 2.33 The public sector comprises central government, local governments, and more than 100 public enterprises in agriculture, industry, transport, commerce or finance that are wholly or partly government-owned and operated. Since 1963 the fiscal year has been identical to the calendar year. Budget preparation begins in July of the preceding year on the lowest level of public enterprises or government ministries (see Budget Formulation, below). The final step is presentation of the central government budget to the People's Council in early November. 2.34 Budget preparation and presentation were to some extent refEormed by Legislative Decree No. 92 of 1967, the Organic Finance Law, which came into effect, as intended, in 1971. Before that time, separate central government budgets were issued for current operating expenditures-and for capital (investment) expenditures, accompanied by a number of separate suppleamentary budgets for the annual accounts of individual entities such as a ministry or a public enterprise. The central government current and capital budgets are still prepared separately, but become the two portions of a single central government budget. Separate accounts for individual entities have also remained part of the budget preparation, but instead of being published as - 34 - supplements they have been integrated into the central government budget, in which only the net balances of local governments and public enterprises appear. Budget Formulation 2.35 Until the 1967 Finance Decree and consequent 1971 reform brought a more unified central government budget document, budgeting in Syria was a haphazard, largely uncoordinated process producing a number of almost inde- pendent budgets. Each ministry had its own pipeline to the public coffers and little real effort was made to budget on an overall national basis. The Finance Decree had specified that the individual annual accounts henceforth to be integrated into the consolidated central budget would fall into two types: detailed, line item accounts prepared by ministries and other agencies forming part of the central government per se; and the accounts prepared by local administrative units, public enterprises, and Al-Awkaf directorates (singular wakf - charitable religious endowments) of which only the net bal- ances enter the national budget. These guidelines have been followed in recent years. The annual budgets prepared by each regular government ministry detail all anticipated current operating expenditure to cover the functions for which they are responsible, and investment expenditure to enter the central government capital (investment) budget. The detailed budget for the local governments, public enterprises, and Al Awkaf directorates is formulated by them without central approval or supervision. If a deficit occurs in the balance for a particular body, an allocation is made in the general budget to cover the deficit and it appears as an expenditure. Allocations for invest- ment expense of public enterprises appear in the central government capital (investment) budget and are usually financed out of the Public Debt Fund in the Ministry of Finance according to the provisions for implementing the economic plan. The allocations to offset deficits of local administrative units and the Al-Awkaf are itemized in the general budget within the account of the ministry to which each is attached. The expenditures in local admin- istrative units are broken down by provinces. If the net balance of any of these bodies is a surplus, it is recorded as a separate account under revenues in the general budget. 2.36 The formulation procedure for the central government capital (invest- ment) budget differs from that for the current operating budgets. The process of preparing the operating expenses of the regular ministries is carried on under a set of permanent instructions as well as under special instructions issued each year by the Ministry of Finance. Preparation begins in each operating unit of the various ministries and public enterprises in July or August. Estimates are made, largely on the basis of last year's budget, of expenditures for salaries, wages, general administration, transfers, debts, and the like, and are forwarded to the respective ministers, who consolidate the budgets for their ministry. 2.37 The ministerial budgets go to the Ministry of Finance where they are reviewed by the Budget Office. This office has a staff of only 25 per- sons, no more than it had 5 years ago when the budget was much smaller. It has been authorized 20 to 30 new positions but has been unable to fill them - 35 - because of the competition for talent by the private sector. The review process is largely pro forma. The Budget Office does not hold budget hear- ings, question expenditures in detail, or request supporting justification. If items are in dispute, the Minister of Finance negotiates with the cDn- cerned minister. FIGURE 2-4: Budget F-orolation Process, 1977 JULY/AUGUST NOVEMBER JANUARY 1 8 ~~~~~~~ ~ ~ ~~~~~MINISTRY PRIME _ CURRENT OF FONNERATINGTE OPERATING OPERATING _ MINISTFY -F10 COPLES N EXPENDITURES XBUDGETC PUBLIC~ ~~~~~~~~~O FC COMPANIES STATEMINISTERS Bt SUDGET ~~~~~~~~~~~~~~~~~DECREE EXPENDIT PLANNING PLANNING EXE (fUE GENERAL COMMISSION COUNCILG J ORGANIZATIONS World Ba-k - 177.2 Work Flow _ _ _ _ Consultation 2.38 The Minister of Finance forwards a draft budget to the Prime Minister and the Council of Ministers along with a detailed economic and financial report. After review and approval by the Council of Ministers, a summary of the budget is presented to the People's Council, where it is supported by the Minister of Finance. This step is scheduled for early November, four months after the process begins. The Budget Committee of the People's Council holds hearings with the various ministers, leading to approval and delivery to the President, who issues a decree that displays the Budget in global figures only without itemized accounts. 2.39 The individual budgets of public enterprises, which do not receive central review, are prepared according to rules specified in the respective - 36 - financial ordinances for those enterprises. However, investments by these enterprises, before appearing as capital expenditures in the investment portion of the general budget, do go through a central review process. A public enterprise, working with its General Organization, prepares a capital expenditure request, presumably within plan guidelines, which is submitted to the State Planning Commission. The process of review may involve con- sultation between the SPC, the Minister of Finance, and the concerned minister. Final approval of an investment is given by the Supreme Planning Council. Thereafter, the central government capital expenditure budget follows the same process to Presidential decree as the current operating budget. (See Figure 2.4.) Budget Execution 2.40 Execution begins after final budget approval, when the Treasury has revenues available for expenditure. Public revenues are deposited with the Treasury in the Ministry of Finance, which disburses funds in accordance with two procedures. For expenditures in the current operating budget, the Minister of Finance distributes funds according to the approved budget. Little con- sultation with the operating unit is required at this time because the pre- vious formulation process approved the expenditure. The Minister of Finance issues orders to the ministries authorizing expenditures. If the budget has not been approved by January 1, the ministries may spend at the previous year's rate until it is approved. The Planning and Statistics Department of the Finance Ministry maintains a record of expenditures and prepares a quar- terly report. The Ministry of Finance has accountants in each ministry for this purpose. A final report for the calendar year is to be submitted to the Central Bureau of Financial Control within six months after year's end. The Central Bureau performs an after-the-fact audit, whereas the Ministry of Finance officials stationed in each ministry approve expenditures before the fact, determining their legality and the availability of funds. The audit report of the Central Bureau is to be presented to the Council of Ministers within one year. In turn it goes to the People's Council and accounts are closed for the year. Thus, if normal procedure is followed, the exact expenditures for a budget year are not determined precisely for a year and a half after the budget year ended. In fact, the time may be longer. 2.41 The investment budget contains the largest portion of expenditure. The Supreme Planning Council distributes the funds approved for investment projects to the ministries and public enterprises. This process of alloca- tion is much more elaborate than the comparable stage for the operating budget. In consultation with the concerned ministries, General Organizations, and public enterprises, the Council may decide to limit some budget expendi- tures and set up reserves with these withheld funds. Orders are then issued authorizing expenditure. Unlike the regular ministries, agencies may not begin spending at last year's rate if the budget has not been approved. Instead, they may obtain advances out of the reserve fund, which must be returned to that fund. The State Planning Commission is responsible for main- taining investment records and preparing quarterly reports. The financial review of the capital expenditure is conducted by the Financial and Monetary - 37 - Planning Directorate of the SPC, while the evaluation of the physical develop- ment occurring from the investment is performed, possibly by site visit:, by the concerned sectoral unit in SPC (for example, building and construction, transportati-_c, agriculture, or industry). The annual investment budget report is also prepared by the SPC and goes through the same review process as the operating budget. 2.42 The provinces and municipalities (see Appendix 2B to this Chapter, Local Administration) are eventually supposed to have their own independent budgets. In the meantime, the greater part of their expenditures is financed under the national budget; the Treasury disburses funds to local treasuries in the provinces from which local government units draw under the provisions of their budgets. Some units, like the University of Damascus, spend monies deposited in a bank by the national Treasury. Conclusions 2.43 The Government of Syria has begun to reform its budgetary process, most notably under the law of 1967. However, the process is still nol: com- prehensive and integrated. Public enterprises prepare their own individual budgets; it is not possible to control an enterprise budget about which the only information received consists of surpluses and deficits. The review process for the operating budget is perfunctory, little attention being given to policy implications and relationships to plans. As in so many areas of administration in Syria, the need for qualified entrants and training of existing staff are great. The time required to close accounts for each budget year prevents the use of that essential information in the preparation of the next budget. RECOMMENDATIONS 2.44 This study has noted a number of administrative constraints to social and economic development in Syria. The President of Syria has pro- posed, and the People's Council has approved, a series of recommendat:ions to improve the quality of government personnel and the processes of administra- tion in government ministries and public enterprises. In implementation of these recommendations and to overcome existing constraints to development, the following proposals are made (see Figure 2.5): 2.45 An Advisor for Administrative Affairs should be added to tne President's Bureau to supplement the existing Advisors for Political Affairs and for Economic Affairs. 2.46 A Deputy Minister for Administrative Development, responsible to an appropriate Minister of State, should be appointed to direct, coordinate, and oversee a program of administrative development within the Government of Syria. This new Deputy Minister should be administratively responsible for the existing Planning Institute for Social and Economic Development, Manage- ment Development and Productivity Centre, and Organization and Management FIGURE 2.5: Proposed System for Administrative Developmerlit, 1977 1980 ~~~~~~~PRESIDENT'S BUREAU| PRESIDENT ADVISORS FOR POLITICAL ECONOMIC I ADMINISTRATIVE AFFAIRS AFFAIRS AFFAIRS _ PRIME _ CENTRAL ORGANIZATION FOR MINISTER INSPECTION AND CONTROL COUNCIL OF MINISTERS _ tmA ADVISORY COMMITTEE FOR' MINISTER OF STATE ADMINISTRATIVE DEVELOPMENT 11. PRESIDENTIAL ADVISOR FOR ADMINISTRATIVE AFFAIRS 2. PRESIDENTIAL ADVISOR FOR POLITICAL AFFAIRS 13: PRESIDENTIAL ADVISOR FOR ECONOMIC AFFAIRS 4. PRESIDENT UNIVERSITY OF DAMASCUS 5. A PUBLIC EXECUTIVE 6 _. A PRIVATE EXECUTIVE DEPUTY MINISTER 7. ARAB ORGANIZATION FOR ADMINISTRATIVE SCIENCE FOR S S. DEPUTY MINISTER FOR ADMINISTRATIVE DEVELOPMENTI ADMINISTRATIVE - -_ -_________J DEVELOPMENT I I - ~~~~~~~~~~~~~~~~~POPOSED BY |.|._ .i ORGANIZATION HIGHER INSTITUTE I PLANNING INSTITUTE MANAGEMENT PUBLIC SERVICE AND FOR FOR DEVELOPMENT DIRECTORATE I MANAGEMENT ADMINISTRATIVE I SOCIAL AND ECONOMIC AND DIRECTORATE | DEVELOPMENT DEVELOPMENT PRODUCTIVITY II .......'.. I11 I |I I I I I MINISTERIAL 0 AND M PROPOSED MINISTERIAL TRAINING OFFICES EXISTING - - - - PROPOSED - 39 - Directorate; the Higher Institute for Administrative Development proposed by the Prime Minister; and the Public Service Directorate proposed by this study. 2.47 The existing Organization and Management Directorate, now located in the Prime Minister's Office, should be strengthened, if necessary with foreign assistance, so that it can provide effective leadership for adminis- trative improvement throughout the government. Eventually it should promote and assist the establishment of similar units for administrative reform and reorganization in each ministry and provide policy guidance for their work. This unit should also be responsible for conducting research on the adminis- trative system of Syria to provide a sound, factual basis for continued improvement. 2.48 A Higher Institute of Administrative Development should be estab- lished immediately, with foreign assistance if necessary, to train and develop executive and managerial talent for public service. Policy guidance should be provided by a proposed Advisory Committee for Administrative Development, responsible to the Minister of State to whom the proposed Deputy Minister for Administrative Development should report, consisting of such officials, as the President's Advisor for Administrative Affairs, the President's Advisor for Political Affairs, the President's Advisor for Economic Affairs, the President of the University of Damascus, a distinguished public executive, a distin- guished executive in the private sector of the economy, a representative of the Arab Organization for Administrative Science, and the Deputy Minister for Administrative Development. Eventually this Institute should promote and assist the establishment of administrative training programs in each af the ministries and public enterprises and train the needed trainers for t'hese programs. 2.49 A uniform public personnel decree should be promulgated establishing a Public Service Directorate and procedures for job evaluation and classifica- tion according to duties and responsibilities, selection according to qualifi- cations to perform job assignments, a compensation system related to level of duties and responsibilities, and promotion and salary increases related, in part, to job performance. Salary levels should be adjusted to assure the attraction and retention of qualified persons. If necessary, foreign. assis- tance should be sought to formulate and implement a new personnel system, but Syrian participation in the process should be guaranteed to assure that it is suited to Syrian needs. - 40 - CHAPTER 2 APPENDIX 2A THE PUBLIC SERVICE 2A.01 The civil service regulations formulated by the French in 1926 had become a patchwork of conflicting and overlapping rules that were inadequate for independent Syria. The French authorities, in anticipation of their with- drawal, drafted a Basic Personnel Law adopted by the Chamber of Deputies in 1945. The law was inspired by the experience and background of its European authors and reflected little awareness of the needs of a Syrian nation or of a government attaining independence. The Western concept of impersonal bureau- cracy, incorporating procedures focusing on the position rather than the incumbent, was introduced in a society that valued fragmented personal loyal- ties and ascribed status. The difficulty of establishing an effective per- sonnel system was compounded by a subsequent history of almost constant political instability and turmoil. 2A.02 The Basic Personnel Law of 1945 embedded personnel regulations in formal law and gave them a fundamental organic character. In actual practice the regulations were frequently changed, usually not by the legislature, but by a legislative decree of the President, the Council of Ministers, or a mili- tary regime. The 1945 legislation attempted to establish a comprehensive civil service system and to provide for the structure of administrative agen- cies; personnel ranks and pay scales; selection, placement, and disciplinary procedures; and a retirement plan. Some provisions were excessively detailed, but others were vague, ambiguous, and incomplete. In spite of many changes, elements of this system persist in the "traditional" ministries and depart- ments of government; public enterprises operate under distinctly different laws and regulations. The hierarchical structure of ministries has remained essentially the same as provided in the 1945 law, although their number has tripled and the size of the service has expanded greatly. The rank system of classification within the regular civil service has been continued with slight modification. Pay scales have been adjusted, but only three times between 1952 and 1976. Official selection and placement procedures have remained the same since 1945, but informal political appointments have intru- ded in the process extensively. Much more education and slightly more training are available today, but not enough to achieve the professionalized service desired. Growth of the Public Service 2A.03 The majority of government employees today are not civil servants subject to the Basic Personnel Law and its amendments, but employees of public enterprises. It should be noted that the Arabic word muwazzaf, usually trans- lated civil servant, comes closer in meaning to the French "fonctionnaire." The connotation of the Arabic term is an official of the state giving service to the Government or an employee exercising official authority rather than a servant of the public. In addition, the Basic Personnel Law provides for a category of "employees" (mustakhdimun) who work in government doing low-level, nonprofessional work. 2A.04 The tremendzuls ic: si>z-. of Lae puolic service ancom- panied rapid population orow-t> e;p.s±or cC the national budget, and iar- reaching extension of government responsibilities, especially after the advent of the Ba'ath go-ernmen-t in !i9.3 and the ensuing nationalization. In 1938, when the population was 2.8 milljon, Lhe entire civil service (including public school teachers, the gendarmery end police, and workers in the postal, telegraph, and telephone serviceo) totaled 8.182, plus an additional 8:17 non- professional workers. In the first ten years after independence (1946-1956), the civil service (not counting security and defense forces) almost doubled, from 8,000 to more thani 15,000. Emplovment in the Ministry of Education alone doubled, accounting for 5,778 of the total increase of 7,406. 2A.05 Two decades later (as of January 1, 1975), -when the population was 7.4 million, the staff ef general government and public enterprises totaled 2513708 (excluding Defence Employment in some of the traditional ministries multiplied because of expanded services (Education by over 400 percent3 Health by over 1,200 percent); in others it grew because they took on new activities (Economy added Foreign Trade, Agriculture added Agrarian Reform). Ho-wever, the greatest expansion occurred because of the proliferation of ministries providing new services and operating nationalized enterprises. These included the ministries of Supply and Internal Trade; Industry; Petroleum and Mineral Resources; Electricity; Communications, Transport; Euphrates Dam; Local Admin- istration; and Tourism (see Table 2A.1). Classification and Salary Scale 2A.06 The corps of civil servants is classified in a rigid pervasive system in which rank is related to level of education at the time of entrance. Initially, eleven ranks were categorized into three groups. A university degree was required for entrance into Group One, a secondary certificate for Group Two, and an intermediate certificate for Group Three. Essentially the same rank system exists today except that the number of ranks has been slightly modified, the level at which holders of various degrees and certificates enter the service has been altered as educational opportunities expanded, and the salaries assigned to each rank have been raised somewhat. - 42 Table 2A.l: NUMBER OF PERSONS EMPLOYED BY SYRIAN GOVERNMENT 1946, 1956 and 1975 (in number of employees) Employer 1946 1956 1975 Presidency 11 9 224 Prime Minister's Office 144 165 1,549 Parliament 37 92 78 Foreign Affairs 204 132 421 Finance 824 1,202 6,584 Interior 415 432 904 Public Health 316 462 6,225 Justice 999 1,304 2,235 National Economy 332 127 18,406 Labor and Social Affairs - 49 1,947 Agriculture - 744 9,046 Public Works 187 305 2,931 Education 4,140 10,218 59,457 Supply and Internal Trade - - 7,567 Industry - - 40,910 Petroleum and Mineral Resources - - 15,574 Electricity - - 8,379 Communications - - 11,606 Transport - - 14,150 Higher Education - - 4,815 Culture and National Guidance - - 1,195 Information - - 2,016 Tourism - - 221 Euphrates Dam - - 13,885 Housing and Utilities - - 3,089 Local Administration - - 15,128 Al-Awkaf /a - - 3,166 Security Forces 6,322 7,027 - Subtotal, Civil Servants 14,328 22,439 251,708 Nonprofessional Employees (mustakhdimun) 1,761 5,596 n.a. Total 16,089 28,035 n.a. /a Al-Awkaf (singular wakf) are charitable religious endowments. Source: Ralph Earl Crow, The Civil Service of Independent Syria: 1945- 1958, (Ph.D. dissertation, Ann Arbor, University of Michigan, 1964). Central Bureau of Statistics, Statistical Abstract of Syria, 1976. 4 - 2A.07 At present there are ten ranks plus an extraordinary rank; each rank has three in-grade steps, except for the fifth rank, which has two (see Table 2A.2). Two years must be spent at each step for a salary increase or promo- tion. The lowest rank now requires an intermediate school certificate (Brevet) earned after nine years. A person with a secondary school education (twelve years, leading to the Baccalaureat) enters at Rank IX. Upward move- ment occurs biennially until a7iZe1i~ngi_s-reached at the third step of Rank VI. Those with a diploma from a technical school (such as commercial, agri- cultlural, veterinary, or teaching) earned after fourteen years, enter at Rank VII and peak at the top step of Rank III. University graduates with the Licence enter at Rank V, Step 2; with a Masters Degree, at Rank IV, Step 3, and with a Doctorate, at Rank IV, Step 1. 1/ The ceiling for those with degrees in higher education is at the top step of-the Extraordinary Rank. 2A.08 In contrast to this system of rank classification in the civil, ser- vice, positions in public enterprises are classified by a system of job evalua- tion covering 90 percent of all positions. The Ministry of Labor appoirLts a committee consisting of ministry personnel and union representatives to collect empirical data on job assignments, classify positions according to the t:ype of duties, and grade them according to the level of difficulty and responsibili- ties. Promotion is usually on the basis of seniority. Wages are set accord- ing to the prevailing scale in business or industry. 2A.09 Salaries in the civil service are set by government. In spite of upward adjustments, salaries have always been modest. Nevertheless, civil service positions have frequently been sought because of the security they provide and the influence which they may wield, especially in the higher ranks. At the same time, because salaries have been persistently low many civil servants have been motivated to supplement income with outside employ- ment, a practice which is prohibited but possible because workdays are typic- ally six hours long. Also, many employees who begin their careers in govern- ment move on to other jobs when the opportunity presents itself. At the present time salaries in the private sector are increasing; they are often two to three times higher than in government, so the attraction is great. Jobs in the oil-rich Arab nations are also luring civil servants with salaries at levels that are reported to be six to seven times higher. 2A.l0 Supplementary allowances have been provided since the Basic Personnel Law of 1945 and constitute a means by which inadequate salaries are enhanced. Many of the allowances have been provided by independent and autonomous budgets in addition to those provided in the ordinary budget. Three allowances which are being paid at present were systematized by a Legislative Decree in 1953. The first is the qualifications, or specialization, allowance which is paid to technicians, engineers, doctors, and pharmacists. Technicians receive a supplement of between 25 and 35 percent; the three professions receive 85 percent, if they are at the junior level, and 100 percent, if at the senior level. Overtime allowances are a second type; the supplement is 25 percent, up to maximum of 40 percent of salary or SL 200 per month, whichever is; less. 2! Third, those working in the Ministries of Petroleum, Electricity, or the Euphrates Dam, as well as secondary school teachers of certain subjects like physics and foreign languages, receive a supplement of 100 percent. 1/ According to Legislative Decree No. 1, 1975. 2/ According to Legislative Decree No. 67, 1963 which amended the Basic Personnel Law of 1945. - 44 - Table 2A.2: CIVIL SERVICE CLASSIFICATION AND SALARY SCALE, SYRIA, 1977 Biennial Education RcQuired Rank Step Salary Step Increase (SL/month) (SL) 9 years (Brevet) X 3 345 15 2 360 15 1 375 15 12 years (Baccalaureat) IX 3 385 10 2 395 10 1 410 15 VIII 3 420 10 2 435 15 1 445 10 14 years (technical school VII 3 455 10 certificate) 2 470 15 1 480 10 VI 3 505 25 2 530 25 (Ceiling for ranks X, IX) 1 555 25 16 years (Licence) V 2 585 30 1 615 30 Masters Degree IV 3 645 30 2 675 30 Doctorate Degree (Ph.D.) 1 705 30 III 3 735 30 2 795 60 1 855 60 II 3 915 60 2 975 60 1 1040 65 I 3 1160 120 2 1280 120 1 1390 120 Extraordinary I* 3 1500 120 2 1610 120 (Ceiling for ranks V, III) 1 1720 120 Source: Data provided by State Planning Commission. - 45 - Selection and Placement 2A.11 The intent of the Basic Personnel Law was to create a merit system that was open to all Syrians on a competitive basis. That policy persists although it is often not honored in practice. As the new system was talking shape immediately after independence, operating procedures were often politi- cally inspired and political appointments were commonplace. A significant number in the top ranks were formally excluded from the requirement of com- petitive examinations and gradually this area of exemption was enlarged; in 1956, ten years after independence, a majority of appointments in Group One were being made without competitive examinations. In the top four ranks (Group One then had five ranks), only six examinations were administered among 222 appointments. The reliance on an educational degree to determine merit, especially a university degree for the higher ranks, further closed a service which was supposed to be open to all. Educational opportunities were not, and still are not, available to the majority of Syrians. The higher service became, and persists as, an educational elite, although the availability of education is far more widespread than it was thirty years ago. Even when a formal examination had been used, the procedure did not contribute to merit selections. To avoid dishonesty in the procedure, examinations were prepared at the last moment by a committee which was not expert in preparing valid and reliable examinations. Questions tended to concentrate on textbookish, legal- istic subjects which were unrelated to performance on the job. 2A.12 The nationalization of 1964 and 1965 led to accelerated departure of trained managers, scientists, and technicians, who left government and some- times the country. Since 1974 higher wages and employment opportunities in neighboring Arab countries have accelerated the rate of emigration. Shortages of critical skills and talents have been felt. Therefore, a 1975 decree required that all engineering and medical graduates must go to work for government. Lists of graduates are sent to the Organization and Management Directorate which assigns engineers to ministries according to needs. Higher degree holders are placed in part on the basis of their willingness to serve in the provinces. 2A.13 There is no central personnel agency performing the usual functions of a personnel office. The Organization and Management Directorate has a responsibility to select and place people, but because the intake has slowed and several categories are automatically hired, its personnel tasks are limited. In recent years annual hiring has included about 1,600 engineers, between 600 and 900 university graduates, and some 500 secondary school graduates. The turnover among clericals with the secondary schooling has been particularly high, so that much of the intake has been for replacement rather than expansion. Interviews have been substituted for tests in the hiring of secondary school and university graduates. Emphasis is placed on the need to judge personality to determine whether the person will fit: into the organization. 2A.14 In early 1977 a freeze was imposed on civil service hiring until the Organization and Management Directorate could complete a manpower survey and more precisely identify specific personnel needs. The only exception - 46 - applies to the engineers and higher degree recipients who continue to be employed under the 1975 decree. Productive and economic enterprises are not subject to the hiring freeze. Training 2A.15 Any public service which seeks to achieve competence on the job and professionalism among its staff must provide appropriate and effective train- ing. The importance of training is even greater when the recruits are not selected on the basis of job-related, qualifications. Although some signif- icant developments have occurred in recent years, the government of Syria needs to give much greater attention to this critical matter. 2A.16 In the first dozen years of independence, only two ministries insti- tuted in-service training programs. The Ministry of National Economy 1/ provided a year-long program in statistics and the Ministry of Agriculture offered instruction for some staff members through veterinarian and agricultural schools. Aside from these limited efforts, most ministries conducted only the most informal orientation of new employees to acquaint them with their duties. 2A.17 At the present time the Ministry of Industry operates a Vocational Training Department providing technical and vocational training for public industrial enterprises. The quality of the instruction suffers from a lack of qualified instructors. The educational system is still not equipped to produce a sufficient number and the competent instructors are often attracted to higher paying jobs in the private sector. The critical shortage of super- visory personnel-is ignored by this Department. No effort is made to train foremen, leadmen, and supervisors. 2A.18 The Management Development and Productivity Centre was created in 1966 to provide training, consultancy, and research service for government ministries and public industrial and economic enterprises (not including mining and construction). It is a semiautonomous agency of government receiving policy guidance from a board of directors chaired by the Minister of Industry. Its creation and initial operation were assisted by the Inter- national Labor Organization. That cooperation ceased in 1971 but the board of directors has recently approved renewal of assistance through the United Nations Development Programme (UNDP). 2A.19 The Centre operates through five divisions: industrial engineering, financial management, general management, textile productivity, and organiza- tion and management. The latter division directs its training toward govern- ment ministries. Training sessions range from one week to a maximum of six months. Most last two to three weeks. All trainees are currently employed. The training is directed at three levels: general managers of public enter- prises, middle managers, and first-line supervisors. The general managers are usually political appointees and constitute the smallest group trained; the 1/ Since then the name of the Ministry of National Economy was changed to Ministry of Economy and Foreign Trade. 47 - largest group consists of middle management. Training for supervisors is entirely technical in nature, neglecting the need to sharpen supervisory skills. The Centre attempts to provide follow-up assistance after concluding a session by sending trainers to work locations and helping trainees implement their learning. 2A.20 In the early years after its creation the Centre did not get many participants for its programs so that it was necessary to work at recruitment. Often those sent by their agencies were not the better employees. In recent years that situation has changed. The Centre reports that it is being deluged by applicants and the quality of many trainees is rising. 2A.21 The Planning Institute for Social and Economic Development was also created in 1966 as part of the government's new thrust into public service training (see Chapter 2, Planning Machinery). A semiautonomous government body, it is directed by a board of directors headed by the Minister of State for Planning Affairs. Its principal goal is to train social and economic planners for the Government of Syria, but some of its students are occasion- ally from other Arab countries. For its first ten years it received assistance from foreign advisers supported by the UNDP. Since the beginning of 19377 the Institute has been entirely under Syrian leadership and faculty. 2A.22 Institute students are government employees whose service ranges from two years to fifteen or twenty years. All must have a university degree, usually in law, economics, engineering, agriculture, or commerce. The entrance examination to the Institute tests for knowledge of mathematics, general economics, and English, the latter being necessary because instruction was in English until 1971 and some of the literature still used is in English. About 60 percent of the students are planners working in ministerial plannir,g units or in the State Planning Commission. The rest are non-planners working in relevant activities. 2A.23 Initially, the basic program was a year long, but in 1970 it: was extended to eighteen months. It requires the full-time participation of students in courses that extend six hours a day. Most of the classes are lectures, but some case studies and field trips are used. The curriculum has four segments. In recognition of the varied backgrounds of the approximately forty students who make up each class, the first four-month segment attempts to bring all students to a common level by means of instruction in English, Mathematics, Statistics, Economic Analysis, Market Economics, and Economic Growth. The second segment is six months long, covering general planning, project evaluation, social and economic statistics, econometrics, national accounts, and socialist economics. After a one-month vacation, instruction resumes along two different tracks: some students concentrate on industrial planning and others on financial planning. The final three-month segment is devoted to thesis writing on subjects dealing with development programs in Syria or general economic programs in Syria and the Arab world. Copies of these are distributed to the concerned ministries and the University of Damascus. - 48 - 2A.24 Over the past ten years approximately 400 students have gone through the long course. A certificate in social and economic planning is awarded and students who return to their jobs get one step increase. Short courses are also offered lasting from three weeks up to three months. Instruction tends to be more specific on topics such as planning at the level of the economic unit, financial laws in Syria, and social planning techniques. Only forty students have participated in these courses over the past decade. 2A.25 Trained planners are essential in developing countries. The Insti- tute is a notable effort to generate that competence. During the period of UNDP assistance specialists in statistics, national accounts, national plan- ning, regional planning, social planning, and management methods conducted the actual instruction, but areas like agricultural planning, transport planning, or energy planning were never covered. Since the departure of the UNDP team, all instruction is conducted by a full-time faculty of two and a part-time faculty of ten or twelve instructors borrowed from the University of Damascus and some ministries. The present staff is inadequate to fulf-ill the goals of the Institute and various government employees in the planning field report that the instruction is "too academic." 2A.26 Syria occasionally uses the facilities of the Arab Organization for Administrative Sciences to train its public servants. Organized in Cairo by the Arab League, this agency provides training in Egypt as well as in member countries. Each year a few Syrians are sent to Cairo but more commonly teams of trainers come to Syria and design programs to meet Syrian needs. Syria may increase its reliance on the Arab Organization, but this can never meet the full training needs in all areas of public service and public enterprise. 2A.27 The Prime Minister recognized this need in his October 12, 1976, policy statement to the People's Council when he called for the creation of a Higher Institute for Administrative Development to train public servants, a proposal that has not yet been implemented. At the same time he directed that another essential task be done to strengthen the public service; he asked that all jobs be evaluated, that job descriptions be prepared, and that specific assignments be made for all administrative and productive tasks so that each person would have a specifically defined set of duties and responsibilities. CHAPTER 2 AMPPENDIX 2B LOCAL ADMINISTRATION 2B.01 Until Legislative Decree No. 15 of 1971, local administration, had cnanged little since the period of the Ottoman Empire. It remained a back- water of government, generally unadapted to developmental needs. It continued to follow the Ottoman-French pattern, which also happened to coincide vrith the British-Indian experience. The provincial prefect and district subprefect served as political representatives of the central authority, seldom growing into development planners and implementers. Thus Wickwar reported in 1962 that with few exceptions "in the course of the last hundred years, the Near East has become to a greater extent than ever before a region of centralized local administration, without the agents of central authority being systema- tically charged to promote organized local initiative." 1/ the President of Syria has since expressed the view that the local units of government should have the power to formulate development projects and raise money to implement them. In pursuance of this objective, the Legislative Decree of 1971 created the Ministry of Local Administration, provided for the popular election of Provincial Councils to have expanded authority, and laid the basis for a gradual delegation and devolution of power to lower levels. The process will be gradual, so the full effects of this new policy cannot be assessed at this time. Structure and Responsibility 2B.02 Syria is divided into two parallel series of local units: the prov- inces and their subdivisions, which are administrative bodies to provide func- tional services on a geographic basis; and municipalities, located within the provinces, which may provide some of their own services, depending on their size. Municipalities are graded by population, ranging from cities (more than 20,000), through towns (10,000-20,000) and villages (500-10,000), to rural areas with no settlements of more than 499. Cities, towns, and villages of over 5,000 population are legal entities. The other distinction is amnong the mohafaza (province), mantika (district) and nawaha (subdistrict); the first being a legal entity, and the last two, administrative subdivisions of provinces. As of 1975, there were 14 provinces (including Damascus, which is the only city which has the status of a province), 51 districts, and 160 subdistricts. There were 391 legal municipalities, of which only 60 were large enough to be classified as cities or towns; 6,293 villages too small to be legal entities; and 7,689 rural areas. 2B.03 The provinces are administered by a governor, who is appointed by the President of Syria. He is responsible for all public services provided 1/ Hardy W. Wickwar, Modernization of Administration in the Near Ea,st (Beirut: Khayats, 1962), p. 37. - 50 - in the provinces other than those which municipalities are able to supply. The former include the services of police and all local offices of central government ministries. Policy guidance is provided by the ministries in Damascus while the governor gives administrative direction to meet local needs and coordinates their activities. Provincial officials in the higher ranks, that is, university graduates and above, are appointed by the central govern- ment; the governor appoints the lower ranks. FIGURE 2B.1: Structure of Provincial Administration and Planning Procedure, 1977 RIME MINISTERW | COUNCIL OF i MINISTERS MINISTRY OF s R LOCAL ADMINISTRATION r8 MNSR PROVINCIAL… - - - - - - - - - - - PROVINCIAL STATE PLANNING COMMI SSION COUNCIL I~~~~~ _ XECUTIVE SPECIALIZED COMMITTEES i ~~~~~COMMITTEE ||. HEALTH COMMUNICATION i ~TTEjJ . SOCIALWELFARE PUBLICWORKS I . I EDUCATION SMALL DAMS I | I PUBLIC UTILITIES SMALL INDUSTRY I . ~~I . GOVERNOR SOCIAL ANO ECONOMIC PLANNING - GOVERNOR COUNCIL LOCAL REPRESENTATIVES OF MINISTRIES Adrmia.njtive A.th.ntV & Responsibility _ _ __ PlanPning Autho-ity & Respo-sibilit ....... ....-.Xw Oversight Wo,Id Bnk - 17774 2B.04 Traditionally, there have been provincial councils, including both appointed and elected members, with very limited powers. The Legislative Decree No. 15 of 1971 providing for popularly elected People's Councils granted expanded powers. Initially, the ministries whose powers were in part transferred to the provinces included Agriculture and Agrarian Reform, Supply and Internal Trade, Education, Culture, Transportation, Communication, Social Affairs and Labor, Housing and Public Utilities, and Health. A few functions of Industry were delegated to Aleppo; others may be transferred later. The delegation of powers by Tourism and Civil Defence is in process. 2B.05 The first elections for provincial People's Councils were held in 1972 for four-year terms. The President designates one member to be president - 51 - of the Council. Sizes vary from 30 to 100 members, depending on provincial population. Four Councils have just 30 members, the rest between 50 and 100. These Councils meet every two months for periods of four to six days. Between Council sessions, business is handled by an executive committee of six to twelve persons elected from the Council for two-year terms. 2B.06 Major development projects such as cement or fertilizer plants con- tinue to be identified, financed, and implemented by the central government ministries, although provinces may be involved by providing necessary services, such as roads or water. Since 1971 small development projects such as mills, bakeries, and food processing plants may be undertaken by the provinces. Local offices of the State Planning Commission are distributed among l-he provinces. The People's Council may formulate provincial development plans within guidelines prepared by the SPC and with the cooperation and assistance of the SPC. The Council then proceeds to design and implement the project. Provincial Councils also have the right to comment on aspects of the central government plan that affect their province. 2B.07 After a project is designed a copy of the plan is sent to the Minis- try of Local Administration and to the concerned ministry. If the ministry objects to the project and the Council persists in its intent, the matter goes to the Prime Minister and Council of Ministers for resolution. The Ministry of Local Administration has the responsibility of defending the provinces in cases of conflict with other ministries (See Figure 2B.1). 2B.08 The ability of provinces to identify and carry out their oAn proj- ects depends on the availability of financial resources. At the present time, local revenues supply only about one-third of provincial budgets; the rest comes from the central government. Like the national budgets, provincial budgets consist of two parts, investment budget and current expenditure bud- get. Since 1971 there has been continuing discussion about ways and means of increasing provincial revenues, but no decision has been made. In the mean- time, since 1973, provinces have authority, subject to approval of the Minis- tries of Local Administration and Finance, to impose a special tax for one year only to implement a project which the central government is not able to execute. 2B.09 The districts and subdistricts, not being legal entities, are not authorized to have elected councils. However, districts do have small admin- istrative committees of ten or twelve members nominated by the governor and approved by the Ministry of Local Administration, who meet weekly to deal with local, essentially rural problems such as roads, water, welfare, and farmers' loans. The committee staffs and functions in some districts are minimal. Sub-districts are responsible for law and order, for supervision of local vil- lage leaders, and for informing the people of the government's policy and projects. District and subdistrict officials are appointed by the Minister of the Interior, often with the approval of the Ba'ath Party. 2B.10 Municipalities have never been self-governing units, although those down to the size of large villages are legal entities. Cities have appointed - 52 - councils which meet weekly to deal with municipal problems. The next step in the implementation of the 1971 decree will be to hold popular elections for city and town councils, possibly toward the end of 1977. The final stage will be to extend elections to villages and rural areas. 2B.11 Depending on their size and on availability of revenues, municipali- ties may provide such services as streets, street sweeping, street lighting, parks, water sewers, food inspection, and garbage collection. Like the prov- inces, municipalities raise a small amount of their revenue (no more than 25 percent) by means of local duties on such things as slaughtering, restaurants, alcohol, and sewers; the rest is provided by the central government on the basis of population. Municipalities may borrow up to a prescribed limit, but they must balance their budget each year and not run any deficit. Ministry of Local Administration 2B.12 The Ministry of Local Administration, responsible for supervising the implementation of Legislative Decree No. 15, is not to become another layer of administration between the central ministries and the provinces. Rather, it is to serve as a focal point for the development of the provinces so that they may be more capable of achieving their planning goals. It is conceivable that need for the ministry may decline if more effective units of local administration evolve. 2B.13 Specifically, it is the Ministry of Local Administration which pre- pares elections, supervises their conduct, and reports results. It receives notices of the actions of the various local councils and administrative officers, intervening where necessary in their defense if a conflict arises with one of the ministries. By working with central ministerial headquarters, it may assist governors to coordinate the work of the various ministries in their provinces. It stimulates and encourages rural development, formulating appropriate rural units to accomplish this end. Conclusions 2B.14 The initial steps toward decentralization and devolution are note- worthy in a nation with a history of great centralization. The success of the effort is far from certain. Some ministries are jealously guarding their authority while others are more willing to delegate. Resources are limited; even if the taxing power of provinces and districts is expanded, the base on which to draw is very small. More serious is the lack of qualified public servants. The central government has great difficulty attracting competence. The provinces have even greater difficulty and such talent as exists tends to drift to Damascus or other large cities. - 53 - CHAPTER 3 DEVELOPMENT PLANNING AND PERFORMANCE, 1960-1975 3.01 For the first decade of independence (1946-56), the policy of the new Syrian government was to leave the economy reliant primarily on private sector activity. However, this did not rule out government intervention in the economy, including vigorous and at times rather generous government support to the private sector. I/ 3.02 This initial period came to an end during 1957, when negotiations were begun with Egypt to form the United Arab Republic (UAR, 1958-1961). Planning was introduced and the First Five Year Plan drawn up for 1961-1965. Probably the most lasting heritage of the UAR period, however, was the land reform launched in 1958. Egypt, which had set the example in land reform, also began to nationalize its industries, perhaps releasing the counterforces that broke up the UAR and delayed the nationalization process in Syria. for several years. During the nonsocialist interregnum of 1961-1963 not much was done on the First Five Year Plan, but it remained a legal document and the idea of planning was not abandoned. 3.03 The Ba'ath party came to power in 1963 and decided anew in favor of socialism; the Supreme Planning Council and other planning machinery was established (see Chapter 2, Public Administration). The years 1963-1965 have been described as essentially years of contemplation, spent deciding what model of socialism to follow and how much of a mixed economy to develop. 3.04 By 1965 the choice was made in favor of the East European model. The government accelerated the agrarian reform begun in 1958, and in early 1965 began the process by which it took over 80 percent of foreign trade and nationalized all the banks and much of industry--without, however, abolishing private activity either in agriculture or industry. 2/ East Germans became consultants on preparation of the Second Five Year Plan 1966-1970, and stayed in Syria from 1965 to 1969/70. 1/ A World Bank report of the time made this abundantly clear. World Bank, The Economic Development of Syria: Report of a Mission Organize!d by the IBRD (Baltimore: Johns Hopkins University Press, 1955). 2/ For a more detailed account, see Ziad Keilany, "Socialism and Economic Change in Syria", Middle Eastern Studies, vol. 9, no. 1 (January 1973). This chapter draws upon the work of Mr. Wolfgang Stolper (Consultant). - 54 - ECONOMIC PERFORMANCE BEFORE PLANNING, 1953-60 3.05 As in most countries, national accounts estimates essential for the measurement and analysis of growth trends and performance are poor. In Syria, national accounts estimates are lacking for the years before 1953; 1/ and those available for 1953-1960 are not readily comparable with the improved data for later years. The facts about the period before 1960 accordingly become of very dubious validity. The discussion of these early years must of necessity remain largely impressionistic until historical research produces more detail. 3.06 The first striking fact to emerge from the available statistics, in- sofar as they allow one to generalize, is that except during brief intervals, the Syrian economy has grown rapidly. The World Bank report published in 1955 remarked that "One of the noteworthy features of the Syrian economy has been its rapid growth over the last two decades," with both agriculture and indus- try playing a prominent part. This refers to the period from about 1933 to about 1953, taking in part of the mandate period before World War II, the earliest period of independence, and the first three or four years of the period of private enterprise without planning from 1950 to 1957. In the absence of more systematic data such as national accounts aggregates, the report quoted a number of other economic indicators to support its conclusion. It did provide a few of its own estimates, however, putting national income at about SL 1.2 billion in 1949, SL 1.4 billion in 1950 and "perhaps around" SL 1.6 billion in 1953, concluding that "it is not unlikely that real national income has been rising on the average at an annual rate of 5 or 6 percent," (presumably in the years 1948-1953). 2/ 3.07 Bent Hansen differed with the first part of the World Bank estimate, surmising that at the end of the Second World War Syria had been no better off than at the beginning of the first one. 3/ For the period 1949-1956, however, he calculated that the trend rate of growth in net national product (at constant 1963 prices) was 5 or 6 percent a year if extreme crop years were 1/ For Syria, this is hardly surprising. Because of the customs union with Lebanon, no separate foreign trade record was kept before 1951, and in an open economy foreign trade plays a big, if not dominant, role. However, for an attempt to estimate Syrian national income and capital formation for 1936-38 and 1946-48, see Samir Makdisi, "Syria: Rate of Economic Growth and Fixed Capital Formation, 1936-1968," Middle East Journal 25:157- 79, Spring 1971. 2/ It is not stated whether national income is defined in the strict sense or is to be understood more as an approximation to gross domestic product (GDP), net national income (NNI), or some other income aggregate. Inter- national Bank for Reconstruction and Development, The Economic Development of Syria (Baltimore: The Johns Hopkins Press, 1955), pp 18, 20-21. 3/ Bent Hansen, "Economic Development of Syria", in Charles A. Cooper and Sidney S. Alexander (eds.), Economic Development and Population Growth in the Middle East (New York: American Elsevier, 1972). - 55 - excluded, or 4.2 percent a year if they were included; followed by a slowdown in growth beginning in 1958. 3.08 The only series of national accounts estimates for the pre-1960 period, is an official series for the years 1953-1960, in constant 196:3 prices, published by the Syrian government. 1/ On the basis of these official data, GDP increased steadily from 1953 to 1957 at an average rate of 5.4 percent per annum, and then declined steadily until 1960 at 2.3 percent per annum. 3.09 There was a hiatus in growth from 1959 to 1960 which may possibly have been influenced by the uncertainties associated with the union with Egypt (1958-1961) and the attempted introduction of a new policy. Primarily, however, the decline in GDP after 1957 seems to have been concentrated in incomes accruing to agriculture, which (in constant 1963 prices) dropped from SL 1.1 billion in 1957 to SL 612 million in 1960w Whether the initial disrup- tion attendant upon the land reform that began in 1958 may have contributed to that result may be left open, as the weather was unfavorable in any case. The growth of value added (GDP) accruing to nonfarm activity accelerated to 6.1 percent a year in 1957-1960, compared to 5.9 percent a year for 1953-1957. 3.10 In Table 3.1 official Syrian data, and these data as adjusted by the World Bank, are used to derive estimates of growth for the periods 1953-60 and 1960-75. 2/ Growth rates are estimated excluding agriculture, to eliminate the influence of weather; and also general government and "other serviices", which in socialist (and to some extent in French) methodology would not be considered production-related (transport and communications, trade, house rentals and financial services). Growth in general government and "other services" during 1953-60 accelerated at a faster rate than total GDP while there was unfortunately a distinct slowdown of growth in the remainder of the economy (total GDP minus these two categories of "unproductive" services) from a compound rate of 5.5 percent a year in 1953-1957 to 3.6 percent a year in 1957-1960. This slowdown had been noted by earlier observers of the Syrian economy, and was probably the major incentive for the introduction of more formal planning. 1/ Central Bureau of Statistics, Statistical Abstract of Syria, 1969/70. 2/ The rationale and methodology of the World Bank revisions is given in Volume 4, Statistical Annex, A Note on National Acccounts Statistics. - 56 - Table 3.1: GDP GROWTH RATES, ADJUSTED FOR SECTORAL VARIATIONS, 1953-75 (Compound Rates of Growth, % p.a.) GDP, Excluding: Agriculture, General Gross Domestic Government, and Product (GDP) Agriculture "Other Services" Official Data /a Official Data /a Official Data /a 1953-60 2.1 6.0 4.7 1953-57 5.4 5.9 5.5 1957-60 -2.2 6.1 3.6 World World World OfficWal Banyb OfficMl Bank Official Bank t a ~~~~ba/b Ia lb Data Data- Data- Data- Data- Data- 1960-75 8.0 6.7 8.3 6.8 7.3 6.2 1960-65 8.5 8.3 6.0 5.5 4.3 3.3 1965-70 4.8 4.8 7.2 7.5 6.8 7.2 1970-75 10.8 7.1 11.7 7.2 10.9 8.1 /a At constant 1963 market prices. Official data on value-added by sectors, at factor cost, is available only from 1960 on. /b At constant 1963 factor costs. Source: For 1953-60, Statistical Abstract of Syria 1969/70, Table 261, p. 462/3 and Table 273, p. 474/5. For 1960-75, official data are from Table SA 2A.1; World Bank data, from Table SA 2B.1. GROWTH UNDER FORMAL PLANNING, 1961-76 3.11 Comparison of economic performance with and without development plan- ning is obscured by the doubtful comparability of the statistics and by some doubt as to when genuine planning got under way. Moreover, it is difficult to assess the success of such planning as there was. In principle, there are two methods: to compare what was achieved with what was intended (that is done, within limits, for the three five year plans); or simply to analyze as far as possible what happened and why. This is attempted in some detail for the period from 1963 on. - 57 - Planning Methods 3.12 From the comparison of average annual growth rates before ancd since 1960, one might be tempted to conclude that the presence or absence of planning did not significantly influence the trend of growth. 1/ There is reason to believe that the First Five Year Plan (1961-1965) was essentially a plan for development requirements, rather aggregative and general in nature, and during the interval 1961-1962 even this project-list aspect of the plan was neglected. 3.13 In theory at least, the creation of the Supreme Planning Council in 1963 established centralized control of the economy in the framework of development planning. The Ministry of Planning established during the UAR (1958-1961) became the secretariat for the Supreme Planning Council (see Chapter 2, Public Administration). Moreover, after 1963 planning units were established in all the ministries to implement portions of the indicative plan authorized by the Supreme Planning Council. 3.14. Where the First Plan had been formulated in aggregative terms, specific projects and their implementation were considered in the Second Five Year Plan (1966-1970). The Supreme Planning Council itself had to approve all projects of SL 1 million or more. Professor Jan Tinbergen was also consulted, as well as East German planners, who stayed in Syria from 1965 to 1969/70, and were the official consultants for the Second Plan. They prepared material balances, norms, and input-output tables which, however, turned out to be of limited use for planning as they were always three to four years behind. The East Germans also advised on the preparation of a Five Year Perspective Plan, which seems to have been a simple exercise, but no system of comprehensive central planning was ever used. 3.15 The Second Five Year Plan was ratified in August 1966 and became law for the years 1966-1970. The first years were devoted to pre-feasibility studies and infrastructure. The major project was the Euphrates Dam, for which the government signed the contract with the USSR in April 1966. Other major projects were the roads Tartous-Homs-Lattakia-Aleppo, and the new Damascus International Airport. 1/ This is not quite the conclusion of Ziad Keilany, "Socialism and Economic Change in Syria", Middle Eastern Studies, Vol. 9, No. 1 (January 1973), pp. 67 ff and 69. - 58 - 3.16 In November 1970, the "corrective movement" came to power, 1/ and a new policy started with the Third Five Year Plan 1971-1975. There was, how- ever, no institutional change. The stress continued to be on planning cells in the individual ministries; there were to be planning cells in every publicly owned factory and firm, and in large ministries there were to be--or actually were --Directorates of Planning. The weaknesses of the planning methods, in particular the disregard both of cost and benefit calculations and of the budgetary impact of projects, is discussed in detail in Chapter 13. Here it need only be mentioned that the lack of qualified personnel must have contri- buted to the fact that the organization remained only very imperfectly effec- tive. In any case, the administrative - legal hierarchy by 1970, and essen- tially until November 1976, was: Supreme Planning Council State Planning Commission Sectoral Directorates in Individual Ministries Planning Cells in Factories, Firms, Companies 1/ The Revolution of March 8, 1963, which brought the Ba'ath Arab Socialist Party to power, announced the establishment of a program of socialism whose major components were nationalization (of industry, banking, and most foreign trade) and agrarian reform. Less than two years after he became President, General Hafez Al-Assad on November 16, 1970 led a "Corrective Movement" -- a major realignment of politics and government -- which led to the restoration of a democratic and constitutional regime. The People's Council, with members appointed by the Ba'ath Party, and including representatives of all recognized parties and popular organizations, was created on February 9, 1971. The 173-member Council drafted the present Constitution (adopted in 1973), and is the supreme legislative authority. In March 1972, a Progressive National Front (PNF) grouping all political parties and working under the aegis of the Ba'ath party was formed. The PNF consists of the Ba'ath Arab Socialist Party, the Arab Socialist Union, the Syrian Communist Party, the Socialist Unionists, and the Movement of Arab Socialists. President Assad, the Secretary-General of the Ba'ath Party, chairs the PNF. The PNF comprises a central leadership, composed of 17 members: 9 from the Ba'ath Party and 2 each from the other four parties, and Regional Leader- ships, and a number of Offices and Standing Committees. Since its formation, the Front has been the most influential political force in the country. (Antoine Guine, La Syrie Nouvelle, Damascus, 1975. Translated into English by Issam Husseini, as The New Syria, Damascus, 1975, page 106). - 59 - 3.17 The problems of the Third Plan were overwhelmed by the 1973 war. There was considerable damage to harbors, to power, also to the refinery. But Arab aid was generous, and by the beginning of 1975, the war damage hadl been made good. But while the planners started debates on the Fourth Five Year Plan (1976-1980) (which is discussed in some detail in Chapter 13), a plan that was to stress the rapid expansion of manufacturing in addition to agri- culture and utilities, the generosity of Arab aid following the October 1973 war, and the sharp rise in international oil prices in 1973 at a time of increasing exploitation of petroleum, induced such high expectations of resources available in the medium-term future, that the plan and planning itself lost much of its significance as a statement of aims and policies, and a disciplinary document. In particular, many ministries took action outside the plan framework. 3.18 Although the Third and the Fourth Plan are project based, there was an overall framework. However, although every plan had its broad objectives, they were never translated into detailed and operational goals. Ever since 1963, the decision-making process has taken place between the Ba'ath party and the government, with the planners coming into the picture only at a very late stage (see Chapter 2, Public Administration). The projects themselves may originate in the operating ministries, or at a "higher level". In short, des- pite the appearance of a strict planning organization, the process of planning is still very much in flux. The reorganization of the State Planning Commis- sion in 1976 is intended to put more discipline into the planning process (see Chapter 2). Indicators of Growth 3.19 For the period from 1960 through 1966, the World Bank revisions of the origin of GDP by sector of economic activity (Tables SA 2B.1 and SA 2B.2) give essentially the same results as the second series of official Syrian national accotnts estimates based on the 1953 United Nations System of National Accounts (SNA) -- see Table 3.1. This is the period of the First Five Year Plan 1961-1965. Growth of GDP at factor cost accelerated 1o 8.3 percent, but this acceleration was due to good crops, (and, to some extent, the success of land reform) and a very substantial expansion of those service sectors that are not associated with commodity production: while GDP at factor cost excluding agriculture grew at 5.5 percent, when the service sectors are eliminated growth was down to 3.3 percent a year. 3.20 For the period of the Second and Third Plan, however, the picture is different. Though overall rate of growth of GDP at factor cost declined during the years of the Second Plan (1966-1970) it rose substantially during the period of the Third Plan. 1/ However, during both Plan periods, the rates 1/ This movement of growth rates reflects the impact of the drought in 1970 in a two point compound growth rate calculation. - 60 - of growth were much higher when either agriculture alone or agriculture and the "non-productive" services are eliminated. Prima facie, the new plans, and more generally, government policy seem to have achieved the desired ends. 3.21 Whether this was really so can only be determined by further analy- sis. The official data do not allow us to consider separately the influence of mining, that is petroleum production. It would be important to know how much of the increase in GDP was due to that fortunate find. When mining is also excluded from the numbers presented in Table 3.1, it turns out, first that the World Bank revisions give about the same answers as the official data for the period 1965-70 (official data: 4.9 percent p.a., World Bank revisions: 6.3 percent p.a.), but thereafter lie substantially below the official esti- mates (1970-75: official data: 8.9 percent p.a., World Bank revisions: 6.1 percent p.a.); 1/ secondly that the oil finds have made a substantial differ- ence (estimated growth during 1960-65 was 4.5 percent p.a., based on official data, or 3.3 percent p.a., if World Bank revisions are used); but thirdly that growth rates were still substantial by international standards though no different from the period before 1957. However, until the 1965 petroleum finds, in fact the whole mineral sector played a negligible role. 3.22 Two further questions arise: First, to what extent were the prices of 1963 distorted, and have they become even more distorted? Second, to what extent has the development in the non-petroleum sectors been due to the public investments which are supposed to dominate and lead the private sector? Effect of Change in Price Structure 3.23 It has not been possible to make a detailed study of price distor- tions for any years. However, even in the 1950s the government has resorted to substantial tariffs and even complete import prohibitions. Of the later years, only the years of the Third Five Year Plan 1971-1975 have witnessed relatively liberal trade policy. It is therefore likely that prices were increasingly distorted by government policy. In the later years, it is known that the terms of trade within Syria have moved against agriculture (see Chapter 6, Resource Allocation), and Syrian officials have complained of neighboring countries using low agricultural prices to gain cheap imports; and it is known that petroleum prices have quadrupled, probably permanently changing the price structure in favor of petroleum. 1/ This is not surprising. The revisions deal primarily with the process of price deflation. In the official data, which will no doubt be revised, some subseries were not deflated. In the period before 1970, inflation was not a serious problem. - 61 - 3.24 We have concluded earlier that the overall growth in GDP was due mainly to the growth of General Government and "other services", inclucting rentals. If changes in the price structure make a substantial difference to the results of measurement, as is likely, it might be worthwhile to study the effect of price distortions on growth in greater detail than has been possible. For example, the implications for per capita income in the first instance would be that it has grown but that most of the growth was in governmental and "other services". Still, growth of per capita commodity production and asso- ciated services was of the order of magnitude of 1.5 percent a year which seems a very respectable achievement. 1/ 3.25 It is a general statistical practice in most countries to rebase national accounts and production indexes on new price structures as prices move further and further away from their old levels, over time. The GDP estimates should therefore be recalculated by the Government in more current prices. 3.26 Next, we shall try to link investment to output in the public sector, in order to assess the extent to which planning and direct government activity have contributed to the success and the extent to which the respectable rate of development of the Syrian economy-must be attributed to the actions of the unplanned sectors. Investment and Output 3.27 Detail is lacking for the precise distribution of investments by activity and for the public and private sector (except for the years 1970-75 to be discussed in Chapter 13). There are, however, official series on total gross capital formation, public and private, for 1963-1975 in constant 1963 prices and in current prices. Total output in the public and private sectors is available only for 1966. It is known that for the period 1970-75, output of many sectors in which public and private production coexisted, was mostly private. 1/ The income distribution implications of the fast growth of the "Gov- ernment" sector are uncertain, but potentially somewhat disturbing. "Government" here is essentially the salaries of civil servants. The Governmental contributions to GDP through. public commodity production or the provision of "productive" services is included in the sectoral activity concerned. One can not automatically conclude that general services by the Government to the public have increased proportionally to the increase in "General Government". Unlike with the "productive" portion of GDP where outputs are directly measured, with General Government and other services, it is really inputs that are measured and used as a proxy for outputs. - 62 - 3.28 Table 3.2 presents estimates of the incremental ratio of capital to output for agriculture, industry, transport and communication, and for all other activities combined (see also Chapter 4, paras. 4.30 ff. and Figures 4.4 and 4.5 and Chapter 6, paras. 6.11 and 6.14 ff). According to these calcula- tions the ratios are unbelievably low. Instead of suggesting a very high efficiency of all investments or an unusual distribution of investments in favor of sectors which for technical reasons have low capital/output, this suggests that the price deflators used are inappropriate. Table 3.2: INCREMENTAL CAPITAL/OUTPUT RATIOS BY SECTOR OF ACTIVITY, SYRIA, SELECTED YEARS, 1963-1976 /a (At Constant 1963 Prices) Official Data Sector of Economic Activity Mining Transport Agri- and Manu- and Com- Other Years culture facturing /b munications Activities Total 1963-76 2.66 2.66 3.52 1.08 1.83 1963-66 . /c 4.10 5.13 1.95 4.43 1966-70 3.94 2.53 2.66 1.55 2.14 1970-76 1.76 2.59 4.07 0.86 1.54 /a Estimated with one year lag: for example, the ICOR for 1963-66 is the ratio of gross fixed investment during 1963-65, to the difference between the 1963 and 1966 values of gross domestic product (at constant 1963 market prices). /b Including electricity, gas and water. /c Output declined. Sources: Table SA 2C.4, based on official data Central Bureau of Statistics, Statistical Abstract of Syria 1969/70, Table 293, page 494, and Statistical Abstract of Syria 1976, Table 66/17, page 947. 3.29 Data for 1970-76 on investment, output and employment are further analyzed in Table 3.3 where an attempt is made also to distinguish between private and public sector. It is known that in the period 1970-75, most agricultural investments were in the Euphrates Dam and related irrigation projects which are not entirely finished; we know therefore that in agricul- ture the true capital/output ratio must be smaller than indicated in Table 3.3 if we take only the private investments at 13 percent of total agricul- tural investment, while allocating the total output to the private sector. In petroleum and utilities the total investment and total output is public. For manufacturing, we have the allocation of investments, we know that private output is relatively efficient, but from discussions with officials and from the fact that the private sector exports 2.4 times as many textiles and shoes - 63 - as the public sector, 2.5 times as many engineering products, and 3.8 times as many products of the food industries (Chapter 13, para. 13.21) we can surmise that the private sector produces at least 60 percent of total manufacturing output. Internal Plan fulfillment reports place the figure at 62 percent. Table 3.3: ESTIMATED ICORS AND COSTS OF JOB CREATION IN INDUSTRY (PRIVATE AND PUBLIC), 1971-76 Invest- Change in Change in Cost oi- Ia lb IcId JoIe ment- Output- Employment/ ICORS- Additional Job- (SLM) (SLM) ('000) (Ratios) (SL) (sU$_ Manufacturing 1,262.5 375.0 33.5 3.37 37,687 9,663 Private 530.3/f 232.5/g (n.a.) (2.28) (n.a.) (n.a.) Public 732.2/f 142.5/g (n.a.) (5.14) (n.a.) (n.a.) Petroleum 895.5 246.8 9.9 3.63 90,455 23,194 Utilities 408.0 434.0 2.5 0.93 163,200 41,840 Total 2,566.0 1,055.8 45.9 2.43 55,904 1.4,334 /a Gross fixed investment during 1971-75, at 1963 prices. /b The difference between the 1971 and 1976 values of GDP (at constant 1963 factor cost). /c During 1971-75. Id The incremental capital output ratio (ICOR) is defined as the change in output resulting from a given investment. /e At 1963 prices. A crude approximation to costs at more recent prices can be obtained by applying implicit inflators for investment of 1.741 (1973) or 3.885 (1976) (Tables SA 2B.5 and SA 2B.6). Converted to US$ at SL 3.90 = US$1.00. /f It is assumed that investment at constant prices is distributed between private and public as is investment at current prices, based on the internal Plan fulfillment report: 1971-75 investments in current prices (SLM) (%) Manufacturing 2,719 100.0 public (1,574) (58.2) private (1,145) (48.0) /g It is assumed for manufacturing that the "change in output" is distri- buted between private and public as is "total output" (NDP) in 1975 at current market prices (38 and 62 percent respectively) based on the internal Plan fulfillment report. Source: Tables SA 1A.4 and SA 2C.5. 64 - 3.30 Unfortunately, the detailed investment data for the private and public sectors are in current market prices and for manufacturing add up to twice the amount in constant prices. In order to calculate marginal capital/ output ratios, it is assumed that during the period 1971-1975, gross fixed investments in constant prices of 1963 are distributed as they are in current prices (see Table 3.3). There is little doubt that the extraordinarily low capital/output ratios observed in industries are due to two facts: one, utilities have statistically shown marginal capital/output ratios of less than one, which is hard to believe, and, two, private manufacturing is probably two to three times as efficient as public manufacturing. Put some- what epigrammatically and no doubt exaggeratedly: growth was not where the investments went. EMPLOYMENT, PRODUCTIVITY AND INVESTMENTS 3.31 For an assessment of development, employment figures and the devel- opment of productivity are of particular interest. The labor force (or eco- nomically active population) in Syria is defined as the population 10 years of age or older (see Chapter 4, Population, Employment and Incomes). The labor force rose between 1964 and 1975 by 91 percent; the total of employed and unemployed by only 45 percent though the number of employees rose by 56 percent. Since GDP at constant factor cost rose by 80 percent, it appears that productivity, defined as GDP per employee, rose by about 43 percent or by about 3.3 percent a year. As population rose by only 48 percent, output per capita also increased. 3.32 During the admittedly confused period of the Third Five Year Plan (1971-1975), there were substantially different developments in the various sectors. Although there are problems in definition of data labor force and employment in manufacturing actually fell between 1970 and 1973, but in 1975 were about 10 percent greater than in 1970. Most of the increase in the labor force was in construction, and there was no increase in output per man from 1971 to 1975 while in manufacturing output rose by 34 percent compared to a rise in employment of 19 percent, and an annual increase in productivity of about 3.5 percent per employee. 3.33 That employment should increase less rapidly than output is desir- able and natural. The total of investments between 1970 and 1974 of SL 5.0 billion (in constant 1963 prices) has created approximately 268,000 new jobs. Thus about SL 18,460 (US$4,730) in investment was required for each job created, which is probably a reasonable amount (see Table 3.4). - 65 - Table 3.4: ESTIMATED COST OF EMPLOYMENT CREATION, 1970-75 (in SL millions and US$ millions at constant 1963 prices) Mining & Transport Manufac- & Communi- All Other Period Agriculture facturing cations Sector Total Total Investment, 1970-74 (SLM) 1,005 1,745 554 1,647 4,951 Change in Employment: 1970-74 ('000) 164.0 60.4 /a 14.4 29.4 268.2 1971-75 ('000) 3.1 43.4 30.0 151.7 228.2 Cost Per Addi- tional Job /b, assuming investment lag of: Zero /c (SLM) 6,128 28,890 38,472 56,020 18,460 (US$m) 1,571 7,408 9,865 14,364 4,733 One Year /c (SLM) 324,194 /d 40,207 18,467 10,857 21,696 (US$m) 83,127 /d 10,309 4,735 2,784 5,563 /a Of which, manufacturing alone: 20.4. W At 1963 prices. A crude approximation to costs at more recent prices can be obtained by applying implicit inflators for investment of 1.502 (1972). /c Ratio of total investment during 1970-74 to: change in employment during 1970-74 (zero lag), or during 1971-75 (one year lag). Converted to US$ at SL 3.90 = US$1.00. /d Distorted by large irrigation investments; see para. 3.36. Source: Tables SA 2A.5 (official data on investment) and SA 1A.4 (employment data). 3.34 The low average cost of creating an additional job is thus seen to have been entirely due to the increase in agricultural employment (which may have been spurious); the other marginal capital/labor ratios were substantially higher. If we take the increase in employment only between 1971 and 1975 and compare it with the investments between 1970 and 1974, that is, if we intro- duce not unreasonably a one year lag, the picture looks substantially less favorable; agricultural employment rose during that period by only 3,800 persons. On the other hand, manufacturing and mining employment together has risen by 43,400, and industrial employment by 97,200. 3.35 The figures for investment in agriculture in Table 3.4 are clearly meaningless since they are distorted by the Euphrates irrigation development investments which have yet to yield full results. 1! Unfortunately we cannot separate mining from manufacturing investment for the years 1970-74, but the figure of over US$10,000 per additional job created seems high. If estimated investment in the industrial sector for 1971-1975 is compared with the addi- tional employment created between 1971 and 1975, it appears that the cost of creating an additional manufacturing job was almost US$10,000 (see Table 3.4). It is not possible to separate out the efficiency of employment creation by the public and private sector, but it is probable that the public sector required more money to create an additional job than the private sector. 3.36 All in all, the satisfactory showing on an aggregate level looks substantially less satisfactory when disaggregated. It appears that the efficiency of investments in creating jobs was not very high. To parallel our earlier exaggerated formulation: employment was not created where the invest- ments went. GROWTH, CONSUMPTION, AND SAVINGS 3.37 It was pointed out in an earlier section of this chapter how remark- ably similar the growth experience of Syria was during the subperiods into which the history since 1953 and even since 1949 naturally divides itself. It is of further interest to look into savings performance and the change in per capita private and public consumption. It is frequently assumed that with higher incomes, savings should increase, marginally and on the average. But it is also a generally observed fact that governments become more and more important, arrogating to themselves an increasing share of the national resources available. This is true for both "socialist" and "capitalist" economies. 3.38 Now if "growth" is the result simply of spending regardless of pro- ductivity, output should increase with investments by the usual multiplier process. But at the same time one would expect increasing balance of payments difficulties, and one would expect government receipts to increase mainly with this spending, particularly with imports. If spending has truly increased the productive capacity of the nation, one would expect government receipts to increase without changing tax rates or legal changes in the tax base, and one would expect the current budget to show increased surpluses -- other things being equal. 3.39 Among the other things which are not likely to remain equal are of course government expenditures. Defense expenditures may be considered as a datum over which the government has only limited control, and the economist in general, and most certainly the foreign adviser, cannot say anything use- ful. Other government expenditures are, however, another matter. There are important additional services which the government may feel freer to provide if the fiscal situation eases. But there are also pressures to raise salaries or provide socially motivated employment. 1/ Although work on the Euphrates Dam is finished, two power turbines are not operational yet, and irrigation has barely started. - 67 - 3.40 It is therefore of considerable interest to link the tax performance to growth to get an idea to what extent we deal with a growth phenomenon or simply with a multiplier effect, and to link both to the balance of payments, that is, the development of capital inflows. It is also of considerable importance to judge whether any defective savings performance is due umainly to the receipts or the expenditure side of the current budget; and it is finally of interest to get an idea to what extent any deficient savings performance is due to increases in current expenditures which may in t:hem- selves be quite justifiable economically or socially, but whose expansion must nevertheless be curbed in the interest of growth -- that is, of future generations. 3.41 Real private consumption (in constant prices) rose by 85 percent between 1963 and 1975, real public consumption by 202 percent, population by 47 percent, but GDP at constant market prices of 1963 by 87 percent, and at constant factor cost by 96 percent. Thus real indirect taxes fell by 22 percent. It is remarkable that apparently no estimates exist for private or public consumption before 1963, or at least none have been published. While domestic per capita private and public consumption fell, per capita domestic savings fell by 1975 to almost a third of the value of 1965. (All figures are in constant prices of 1963.) 3.42 Real gross domestic savings in constant prices showed substantial fluctuation, were actually negative in 1974 and 1976, and if anything showed a declining trend in absolute value and certainly as a share of GDP.I/ It may however be better to look at data in current prices to investigate also how the current budget fits into the picture. 3.43 Tax revenues have certainly not increased as a percent of GDP in current market prices, though there must have been tax rate increases and changes in the legal tax base. Transfers from public enterprises have increased though Chapters 9 and 10 suggest and Chapter 13 argues that much of that increase is spurious, and represents really capital consumption rather than true profits. Total domestic revenues have increased steadily as a per- cent of GDP from 18 percent in 1966 to almost 34 percent in 1975. Per capita domestic government revenue has certainly increased sharply. But it: has to be remembered that all the increase comes from transfers of economic enterprises, which means in effect from petroleum. So the conclusion must be that petro- leum, not growth or the increase in taxable capacity has led to the increase in budgetary resources. On the other hand, the current budget balance when defense expenditures are excluded has increased steadily throughout the years and has been quite substantial from 1973 on. 3.44 Thus the major reason why domestic public savings did not increase adequately was on the one hand that tax revenues barely kept up with GDP, while defense expenditures skyrocketed. In effect the government did succeed in holding down the growth of non-defense current expenditures. 1/ Based on the residually calculated gross domestic savings (GDS) in Table SA 2B.3, and not the independently deflated GDS in Table SA 5B.7. - 68 - 3.45 A note must be added to the use above of GDP in current prices. Due to the lack of any accepted deflation procedure for savings in national accounting methodology the national accounts in constant prices (World Bank revision) show negative gross domestic savings for 1974 and 1976 and quite low domestic savings in other years except 1972 (Table SA 2B.3), while in current prices they show positive domestic savings in all years. Also, the Government current budget produced in all years a surplus, and occasionally (as in 1974 and 1975) a sizeable one even after an allowance for defense expenditures. (Capital expenditures under the heading "defense" were at all times negligible.) 3.46 The World Bank revision arrives at its savings estimate by deducting deflated consumption from deflated GDP. For most purposes, the separate defla- tion of individual items is the more meaningful procedure. However, the cur- rent GDP figures, if correct, show that there were positive savings. 1/ No deflation can make these savings more than disappear. To address this anomaly, which results from presently accepted national accounting methodology, an alternative procedure is suggested to deflate savings in current prices by the implicit deflator of GDP at market prices, while deflating Government budgetary savings with the implicit deflator of government consumption (World Bank Estimates, Table SA 2B.6). This procedure allows a better assessment of the savings performance of the economy and the Government's share in the performance. 3.47 The calculations are carried out in Table 3.5. So calculated, the savings performance of the economy, while showing big fluctuations, rose from about 7.6 percent in 1966 to 23 percent in 1972, to fall again to 10 percent in 1976. The high savings rates in 1974 and 1975 were clearly due to the large inflows of Arab money, inflows that show up also in the very high fraction of gross domestic savings that is supplied by current budgetary surpluses. 1/ This is a remarkable fact in itself probably due to the improved terms of trade. The implicit deflator for exports has risen much more than for imports. - 69 - Table 3.5: REAL OUTPUT, SAVINGS AND BUDGET SURPLUS, 1966-76 Percentages S7i millions at 1963 prices Current Current Real Gross Real Gross Budget Budget Domestic Domestic Domestic Surplus Surplus Savings Product Savings (Deflated) to Savings to GDP 1966 4,274.2 326.9 125.7 38.5 7.6 1967 4,522.7 357.1 188.0 52.6 7.9 1968 4,718.5 317.9 30.8 9.7 6.7 1969 5,430.4 731.3 217.7 29.8 13.5 1970 5,518.3 493.0 149.8 30.4 8.9 1971 5,873.5 800.2 163.3 20.4 13.6 1972 6,481.2 1,510.4 159.7 10.6 23.3 1973 6,490.8 613.5 309.1 50.4 9.5 1974 6,407.3 892.4 663.2 74.3 13.9 1975 7,448.5 1,436.6 595.0 41.4 19.3 1976 8,011.0 809.7 189.0 23.3 10.1 Source: Tables SA 5B.7 and SA 5B.8. See also paragraph 3.46. 3.48 On the other hand, it remains an astonishing fact that except for the years 1973-1975 (and 1967) the budgetary contribution to gross domestic savings was remarkably small. It must be remembered that government invest- ment was bigger than private investment and that government current revenues include transfers from economic enterprises (including petroleum) which presumably have something to do with the profitability of public investments. By implication, the savings performance of the private sector is remarkably good. 3.49 The conclusion to the questions raised in the preceding sections must be that while the economy as a whole did not perform badly, the difficulties on the side of public savings cannot be laid only to the feet of defense expenditures but must be in part put on the shoulders of the public investment policy.11 1/ It is realized that the deflation procedure adopted may not be generally accepted. In its defense it can only be repeated that it is logically impossible for positive savings in current prices to be translated into negative savings on a deflated basis, even though this is the result of applying accepted national income accounting methodology to Syrian data. Such a figure could only mean what would have happened if with the same physical quantities prices had been different, particularly if the terms of trade had not improved. It cannot mean that the deflated figure for savings measures actual "real" savings. That is, there cannot have been capital consumption in the country as a whole on the level suggested. 70 - 3.50 There is, of course, no mystery how the investments were financed, and where the domestic savings came from; transfers from Arab countries, which are statistically not treated as budgetary receipts, recorded as "residual" in the Consolidated Public Sector Accounts, while "normally" rather small, were over SL I billion in 1973, and over SL 2 billion in 1975 and 1976. PLANS AND ACHIEVEMENTS 3.51 This survey of past developments is concluded with the specific question: how far have planning as such, and the plans, contributed to the developments which could be observed. In the section above it was pointed out that for various reasons the different plans were less effective than would have been thought. It was further pointed out that overall growth rates of different periods both before and after planning started, were just about the same. We have emphasized the special role of petroleum and the fact that fluctuations in agricultural output due to weather caused major fluctuations in GDP. 3.52 The internal plan fulfillment reports of the government which we were privileged to consult, were in some respects more critical of achievements than we would be inclined to be, in other respects less so. The internal reports stressed essentially two facts: was growth bigger or smaller than what was planned? What about the other major aims to change the structure of the Syrian economy so that the "commodity producing sectors" would become relatively more importent. As to the former, on the whole actual growth was smaller, at times substantially smaller than planned growth. Also, actual investments fell frequently short of planned investments. In both cases, for example, even when actual growth exceeded planned growth, as may 1/ have been the case during the First Plan (1961-65), it was not exactly where it was planned to be. For the Third Plan (1970-75), the figures are discussed in some detail in Chapter 13. 3.53 For the First Plan (1961-1965) which was not considered "effective", the actual achievements were better than the Plan (see Table 3.6). "Commodity Producing Sectors" increased by 11.0 percent compound between 1960 and 1965, the others by only 6.6 percent for the overall rate of 8.6 percent, all measured by Net Domestic Product at 1963 market prices. 1/ The reason why one cannot be certain is that the 1969 plan year was the fiscal year from July 1, 1959 through June 30, 1969, while later years were calendar years to which the fiscal year was changed. - 71 - Table 3.6: TARGET AND ACTUAL GROWTH BY SECTORS UNDER THE FIVE-YEAR PLANS, 1960-75 (NDP in SL milions at 1963 prices) A/riculture Ia All Total Agriculture Industry- Construction Services NDP Actual Net Domestic Product (NDP) 1960 /b 587 510 115 1,613 2,825 1965 1,265 670 110 2,222 4,267 1970 1,122 /c 1,024 154 3,064 5,364 1975 1,576 1,732 332 6,294 9,934 Average Annual Growth (%) 1960-65: Plan 5.7 9.1 15.8 6.5 7.0 Actual 16.6 5.6 -0.9 6.6 8.6 1966-70: Plan .. .. .. 7.7 Actual 1.7 /c 11.6 4.1 7.6 4.7 1971-75: Plan 5.2 15.8 11.5 6.0/d 8.2 Actual 9.6 11.4 17.9 15.'i/d 13.1 /a Mining, Manufacturing and Utilities. lb Refers to the then Fiscal Year July 1, 1959 to June 30, 1960. /c Agriculture was relatively stagnant because of uncertainties of land reform, some dry years, and possibly some delays in delivery of irrigation water to farmers. /d The "Plan" and "actual" growth rates were 5.8 and 13.9 respectively for transport, communication, trade, finance and banking, whereas the cor- responding figures for "Plan" and "actual" for rental, administration and other services were 6 and 17.2 respectively. Source: Tables SA 2C.6, SA 2C.7 and SA 2C.8. 3.54 For the Second Plan (1966-70) planned growth is more difficult to document. There was no phasing by years and by sectors. The total NDP was supposed to rise 7.7 percent per annum. The actual growth of NDP al 1963 prices was only 4.7 percent per annum. Data in Table 3.1 show that GDP at factor cost rose by 4.8 percent per annum during the same period. Thus, while actual growth fell short of the 7.7 percent target, it was still substantial. 3.55 For the Third Plan (1971-75) actual growth overall surpassed again planned growth: 13.1 percent compared to 8.2 percent planned. But again we find that GDP at factor cost rose "only" 7.1 percent, alaost as much as NDP was supposed to grow. We have no real explanation of why the various measures of growth gi-ve such a substantial difference in results. Perhaps umore important is that even in the Third Plan (1971-75), actual growth was substantially - 72 - bigger than planned growth in the service sector, but, despite petroleum and good weather, somewhat smaller in the "commodity producing" sectors (see Table SA 2C.8). 3.56 In terms of overall growth one can perhaps argue that the failure to achieve the growth targets was more due to an over-optimistic plan than a poor performance. This however is not possible to argue when it comes to details. It has already been pointed out that in fact the structure of the economy has not changed significantly during the planned era. In particular, despite petroleum, growth has depended too much on the service sectors, particularly those service sectors not associated with commodity production and this is a point stressed in the internal plan fulfillment reports. 3.57 In the discussion on planning in the first section of this chapter and in Chapter 13 reasons are given why this should have been so. This dis- cussion can be supplemented for the first two plans by comparing planned and actual investments. It is, unfortunately, not possible to duplicate the detail given for the Third Plan also for the first two plans. 3.58 During July 1960 through December 1965 less than 60 percent of the revised planned investments were actually executed, but almost three quarters of the investments in industry and agriculture were realized. About a fourth of the actual investments (compared to a fifth in the revised plan) were in the industrial and agricultural sector. 3.59 A somewhat more detailed picture for planned and actual investments during the first plan emerges from an analysis of differences in the figures, due to differences in calculating in current prices, in constant prices of 1961, and in constant prices of 1963. The detail of the plan figures brings out an important fact about the First Plan (1961-65): Although public invest- ments were intended to be 72 percent bigger than private investment, the dominance of the public sector was concentrated entirely in sectors which are traditionally public: irrigation and land reclamation (which accounted for 45 percent of total planned public investments), transport and communications, health and other social services, education and training. Even in industry and mining where the public sector was given an important role, the private sector was expected to invest more. 3.60 During the Second Plan (1966-70), whose investment targets were revised upward from SL 4,955 million to SL 5,490 million, the public sector was for the first time given the dominant role in all sectors except agricul- ture. The actuals seem to have fallen short of either the original or the revised target. A direct comparison between plans and achievements was not made officially in the Plan evaluation document, but a Conference Report contains figures which have an official source. Since construction of the Euphrates Dam started only in 1963, it is quite clear that the total agricul- tural target was not achieved, though the overall industrial target may have been. - 73 - 3.61 There is no sense in calculating a linear regression between gross fixed investments in agriculture and value added in agriculture, because investments are dominated by the not yet finished Euphrates projects and out- puts by the weather. For industrial output it makes some sense to point out that investment levels were substantially higher during the period of the Second Plan (1966-70), and that industrial output (defined as manufacturing, mining and utilities but without construction) grew much faster during the Second Plan period. It is nevertheless not quite certain to which extent it was growth in the sense of an increased productive capacity, or that it: was simply the result of the much larger import surpluses which allowed the financing of bigger spending; that is, to what extent we deal essentially with a multiplier effect of investment spending. Thus between 1963 and 1965, "real" import surpluses were between SL 27 million and SL 38 million; between 1966 and 1970 they range between SL 200 million and SL 450 million. (Table SA 2B.3). Unfortunately, budgetary data do not go back far enough to allow a better judgement of the process of growth. 3.62 It is, however, certain that the heavy emphasis on the public sector, on public investments and public manufacturing output has not changed the structure of the economy as intended. Taking five-year intervals, the share of agriculture in GDP at factor cost has not changed at all, and while the share of industry as statistically defined (mining, manufacturing, construc- tion and utilities) was indeed higher in 1975 than in 1960, that increase was entirely due to the petroleum discoveries. Manufacturing actually declined substantially as a portion of GDP at factor cost. It is the share of General Government and of other Services which has increased. By definition, it is the administration, rather than the public sector enterprises that have increased their contribution to the GDP at constant factor cost. - 74 - CHAPTER 4 POPULATION, EMPLOYMENT AND INCOMES 4.01 Syria has been endowed with a vigorous, enterprising and mobile people. Nevertheless, like other countries which have achieved independence relatively recently, Syria continues to experience serious human resource problems. An exploding population exerts considerable pressure on a cultiv- able land area highly sensitive to variations in rainfall. High levels of illiteracy reduce occupational mobility and economic activity, particularly among females. An accelerating rural-urban drift is throwing a substantial burden on urban infrastructural facilities. Skill shortages are accentuated by a mounting brain drain to oil-rich neighboring countries and further afield. An economic system which has given high priority to social welfare and employ- ment security is finding difficulty in providing adequate stimulus and rewards for effort, initiative and efficient utilization of scarce resources. And despite land reform and the nationalization of major industrial enterprises, inequality in the distribution of assets and access to capital is still con- tributing to moderately high income differentials. POPULATION GROWTH AND URBANIZATION 4.02 The Syrian population is growing at a rate that is among the highest in the world, although it is matched by those of some neighboring Arab coun- tries. The increase in population between the census of 1960 and that of 1970 indicated a compound annual growth rate of 3.3 percent a year (see Table 4.1, Demographic Characteristics). This compares with a compound annual rate of about 2.2 percent in the early 1950s. The crude birth rate has risen slightly from 47 per thousand in 1950 to 48 per thousand in 1970, but the main factor behind the accelerated growth rate is a fall in the death rate from 21 to 14.7 per thousand. This reflects lower infant mortality as well as lower death rates among the older age groups. The average life expectancy at birth went up from 42.8 years for males and 44.9 years for females in 1950 to 53.0 years for males and 56.2 years for females in 1970. The median age of the Syrian population as a whole dropped from 19.2 to 17.3 years in the same twenty-year period. This chapter draws upon the work of Mr. Keith Marsden (Consultant). - 75 - Table 4.1: DEMOGRAPHIC CHARACTERISTICS, SYRIA, SELECTED YEARS, 1960-1975 Population Census Estimates /a Indicator Unit of Quantity 1950 1960 1970 1975 Population Total (thousands) 3,495 4,565 6,303 7,355 Under 20 (percent of total) 51.6 54.1 55.6 56.0 65 and over (percent of total) 4.4 3.8 4.7 4.1 Urban (percent of total) 34.8 36.9 43.5 47.2 Growth rate /b (percent per year) 2.2 2.6 3.3 3.2 Crude birth rate (per thousand) 46.6 47.4 47.8 45.0 Crude death rate (per thousand) 21.4 18.8 15.4 14.7 Life expectancy Males (years) 42.8 47.5 53.0 54.9 Females (years) 44.9 50.2 56.2 58.7 Median age (years) 19.2 17.9 17.3 17.2 /a International Labor Office estimates. See also Appendix 4B to this Chapter. /b Growth rates refer to growth over future time-period (1950-60, 1960-70, 1970-75, and expected growth during 1975-80). Sources: Central Bureau of Statistics, Statistical Abstract of Syria, 1976 (Damascus, 1977). Central Bureau of Statistics, Population Census 1960 and 1970, (Damascus, 196_ and 1974). United Nations Statistical Office, Demographic Yearbook 1975 (New York, 1976). 4.03 Social customs and attitudes and religious beliefs have converged with official policies into a strong pronatalist bias only recently attenuated. Large families are admired and provide security for the parents in old age. Strategic considerations have encouraged a growth in manpower. Incentives provided by the Government have included tax concessions, free transport and education and a medal awarded to large families. Birth control has been hampered by a law prohibiting the sale of and propaganda for contraceptives, by illiteracy among women, by the opposition of religious leaders and by low incomes and a lack of medical facilities in rural areas. 4.04 Some signs of changes are discernible, however, as the economic and human costs of such rapid population growth have become more apparent. Syria's population density, at 40 people per square kilometer (0.386 square miles) in - 76 - 1975, is lower than in many developing countries, but is higher than in the majority of its neighbors (see Volume 1, Chapter 2, Table 2.1). Most of its cultivated land is dependent upon rainfall which in large areas of the country is sparse and subject to wide annual variations. Over the past twenty years (1956-1975), agricultural output has not kept pace with population growth; population went up by 85 percent during this period whereas agricultural production at constant prices rose by only 70 percent. 1/ The surplus of agricultural products available for export has declined drastically; negligible quantities of wheat and barley were sold abroad over the last couple of years compared with 181,000 and 401,000 metric tons respectively in 1963. 2/ Fruit and vegetable exports have also declined dramatically, and Syria has become a net importer of these crops as well as of live animals, meat and meat products. This shift has contributed to the worsening trade deficit. 4.05 Another cost of the boom in births is expenditure on education which reached SL 1.2 billion in 1976--ll percent of the national budget and 5.04 percent of gross domestic product (GDP). Of course, rising educational costs are expected and justified in a developing society eager to increase its intellectual resources and inventory of skills. But the rapid growth in the number of school age children makes it more difficult to increase enroll- ment rates and to raise the quality of education. Progress has been made in these respects, but ample scope for improvement remains. Enrollment is still only 39 percent of school age females in primary, 31 percent in preparatory, and 29 percent in general secondary schools. The poorest provinces (mohafazat) are markedly disadvantaged in educational opportunities at all levels of schooling. At the lower secondary level, five provinces have gross participa- tion rates within the range of 31 to 41 percent compared with a national rate of 55 percent. In these disadvantaged provinces, the female participation rate was only 9 percent at the lower secondary level. In many parts of the country classrooms are grossly overcrowded, making double shifts necessary. Laboratories, workshops, libraries, and teaching equipment are deficient almost everywhere and in many cases nonexistent. Some 28 percent of all teachers are unqualified temporary appointees. 4.06 Further discernible consequences of the population explosion are congested living quarters and overcrowded transport facilities in the main cities. As the employment-absorbing capacity of agriculture appears to be approaching the point of saturation and rural-urban income differentials have widened, most of the increase in total population over the past 5 years has been concentrated in urban areas through migration and the natural increase among existing urban dwellers (see Figure 4.1). Population is expanding by 5 percent per year in Damascus, by 4.5 percent in Aleppo, and by 5.5 percent in other urban areas--but by only 2 percent a year in rural areas. One out of every four Syrians is now living in the two major cities. 1/ Moreover, the value of 1975 output reflected a bumper harvest, whereas 1956 was an ordinary crop year (Table SA7.14). 2/ One metric ton equals 1.10 short tons or 0.98 long tons. - 77 - FIGUZE 4.1 Miuions Spatial Distribution of Population, 1960,1970, 1975a1 of Pesople 7 7.42m Dan ascus & Aleppo Li Other Urban 6 ...... 6 z Rural 2 3 % .. ,~~~~~~~~~...... ,..,.. 6m - Rural . ............ .. 23% 'tin .20%2% ~ 16% 1960 1970 1975 World Bank -18685 /a Data for 1960 and 1970 are from population census returns; 1975 data are projections. Sources: Central Bureau of Statistics, Population Census 1960; Population Census, 1970. 4.07 Rising urban population has required substantial investment in hous- ing which has taken from 20 to 25 percent of gross fixed capital form,ation in recent years, reaching SL 1 billion in 1975. Yet the density of occupation remains high, averaging 2.3 people per room in some areas. In one district of Damascus, the density was already more than 19,000 people per square kilometer in 1970. In transport, more than 2,000 buses have had to be added to the existing stock since 1970, in addition to replacements for depreciated vehicles. Imports of transport equipment cost SL 826 million in 1975 alone, in addition to the cost of motor fuels to operate them. 4.08 It is estimated that 47 percent of the population live in 1households with 8 or more members. Some of the less measurable human costs include ill health from too frequent pregnancy; malnutrition in large families with low incomes; pressures on older children to drop out of school to help support younger brothers and sisters; and the restriction of economic and social acti- vities of women resulting from prolonged child-bearing and rearing responsi- bilities. 78 4.09 As awareness of these costs becomes more widespread, attitudes are changing. The process is gradual. A Family Planning Association was created in 1974, with ministerial support. The Ministry of Health is beginning to in- corporate family planning services into the country's health structure. The law forbidding the sale of contraceptives is widely ignored, with implicit official sanction. A weekly 15 minute radio program on family planning matters is addressed to women. The emphasis is on the health and family welfare as- pects, rather than on family size limitation. In this delicate area, the pre- ferred approach is a step by step one. For this reason, a bilateral aid offer to support a major family planning program was recently rejected. 4.10 Individual and family attitudes are also evolving in response to various socio-economic forces. The most powerful influence is exerted by education, particularly of women. The 1970 Population Census disclosed some significant variations in the number of children born to women with different educational attainments (see Table 4.2). Table 4.2: LIVE BIRTHS PER FEMALE, BY AGE AND EDUCATIONAL STATUS, SYRIA, 1970 (Number of Births) Educational Attainment Inter- Sec- Voca- Literacy Primary mediate ondary tional Univer- Age Illit- Liter- Certif- Certif- Certif- Certif- sity Group erate rate icate icate icate icate Degree 15-19 0.76 0.79 0.70 0.51 0.27 0.41 - 20-24 2.16 2.25 2.07 1.48 0.84 0.73 0.54 25-29 3.89 3.86 3.65 2.70 1.75 1.58 1.21 30-34 5.58 5.30 4.78 3.65 2.82 2.75 1.85 35-30 6.97 6.20 5.36 4.08 3.37 3.58 2.41 Total all ages 5.82 4.15 3.42 2.58 1.98 2.31 1.84 Source: Central Bureau of Statistics, Population Census 1970. 4.11 The total figures tend to exaggerate the variations between different levels of education because educational opportunities for females have widened in recent years, so the more educated tend to be younger. But the differences within specific age groups are still striking. Females with a secondary educa- tion tend to have less than half as many children as illiterate women. Educa- tion increases a girl's exposure to the mass media and to less ephemeral printed material, and enhances her prospects of finding a job outside the home that may compete with raising a large family. - 79 - 4.12 While children are in school, they do not contribute much to the support of the family and thus parents tend to perceive them as having 'Less immediate economic utility, but more long-term earning capacity. Both these factors are likely to lead parents towards a more compact family norm, since a large family is more expensive to educate and a small, well-educated one will be in a better position to aid parents in later life. Various studies have shown that fertility rates are substantially higher in those countries in which children under 15 are economically active, rather than in school. 4.13 Parents with an education themselves typically desire an even better education for their children and realize that if these aspirations are to be achieved, family size will have to be limited. 4.14 Education also reduces fertility by reducing infant and child mortality. A parent who has had some schooling is likely to be more careful about basic sanitation, and to be aware of the value of inoculation and the use of antibiotics. Such a mother is more confident that her own children will survive, and is less likely to want additional children merely as insurance in case some of them die. These various factors are thought to explain a negative correlation between educational level and fertility in several countries, 1/ and appear to be present in Syria as well. 4.15 The process of urbanization usually tends to lead to smaller fami- lies by providing greater access to health services and education, increased familiarity with the more modern economic sectors, and new savings and con- sumption patterns. In Syria, however, there is as yet little evidencea of such results. The 1970 Census showed that there had been an average of 6.0 live births per urban female, compared with 5.7 per rural female. Urban residence must be combined with a substantial improvement in educational levels and family income before the impact on fertility becomes significant. 4.16 On the basis of past trends and Syrian demographic characteristics, United Nations projections indicate that the population will reach 11.8 mil- lion by 1990 and by the end of the century will be 15.8 million, that: is, more than double the present number. Alternative projections by the Central Bureau of Statistics foresee a population level of 11.9 million in 1990. If the authorities were to have doubts about the desirability of an expansion of this magnitude, the most effective means of intervention would be the follow- ing: (a) a major program to reduce adult female illiteracy, to raise school enrollment rates for girls, and to enhance the social, political and economic status of women; (b) efforts to reduce infant and child mortality by making health services more widely available to low-income groups and rural communities, and by tackling such basic causes of disease as lack of safe drinking water, inadequate human waste disposal systems and low nutritional standards; 1/ Robert S. McNamara "An Address on the Population Problem" (speech delivered to the Massachusetts Institute of Technology, Cambridge, Massachusetts, April 28, 1977). - 80 - (c) measures to increase the productivity of small farmers and to expand earning opportunities in the cities (see below); (d) public information programs to inform, educate and persuade people of the benefits of a more compact and manageable family size; (e) action to remove the various incentives to large families and to substitute a more broad-based retirement pension system which would provide an alternative form of financial security to the traditional one; (f) improvement of the delivery systems by which parents can get the family planning services they wish, at little or no cost to themselves. 4.17 These forms of indirect intervention are preferable to attempts to deal directly with the symptoms rather than with the basic causes of popula- tion pressure. An example of dealing with the symptoms is the effort to stop the rural exodus by requiring public sector organizations and private firms with more than 15 workers to recruit new staff through the employment offices set up by the Ministry of Labor and Social Affairs in each province. A worker is expected to have lived in a particular province for a period of five years before he will be registered on the list of the placement service. Thus he is discouraged from migrating in the search for another job as his immediate em- ployment opportunities would be restricted to the informal sector of small- scale activity which is already overcrowded and where his earnings would prob- ably be no higher than in his previous occupation. 4.18 At the same time, attempts are being made to bring about a reverse flow from the cities to the rural areas. An unemployed worker is obliged to accept a post in another part of the country offered to him by the employment office. A draft decree, if promulgated, will extend the period of compulsory public service for university graduates to five years, divided equally between military and civilian duties. Civilian duties might include assignments in rural areas for doctors, teachers, engineers, or others. This proposal may be justified on social and economic grounds and would represent part repayment by the individuals coincerned for the education given them by the state. But other measures to restrict occupational and geographical mobility or to enforce relocation are an undesirable infringement of personal freedom and tend to encourage corruption and to be inequitable in their impact, since discre- tionary administrative controls are more easily evaded by the educated and the more affluent. Mobility of labor is both an income equalizing mechanism and a means of matching the supply of manpower resources with the demand, leading to more efficient labor utilization. If productivity and-per capita incomes in rural areas are to be raised rapidly, the absolute numbers and relative share of the population dependent on agriculture for a livelihood must be reduced. 4.19 This requires a two-pronged attack. First, a higher proportion of investment has to be channelled into rural areas. This is envisaged in the - 81 - Fourth Five-Year Plan 1976-1980. Second, the rate of productive employmnent creation in the main urban sectors must be increased so that the spatial transfer of population and manpower raises aggregate output. To be consis- tent with the first line of attack, this approach calls for a mix of prod- ucts and services and for technologies which are labor-absorbing as well as capital-saving. There is little evidence of a search for such products and technologies, and this may be a major weakness in the current development strategy. This point will be elaborated below in the discussions of employ- ment and productivity by economic activity and in the public and private sectors. LABOR FORCE AND EMPLOYMENT PROBLEMS 4.20 Population and population growth should not be seen only as a cost and a burden--more mouths to feed and bodies to clothe and house. Human re- sources represent a major, if not the major productive input into any economic and social system. Employment is the vital mechanism which harnesses the in- tellectual and physical capacities of a human being for production purposes; it matches skills and aptitudes with needs and preferences and provides indi- viduals and families with the financial rewards enabling them to meet some if not all of their wants. 4.21 The Syrian labor market mechanism has performed reasonably well in these respects. But a few deficiencies and constraints can be identified. First, the total effective demand for labor and the incentives to work have been insufficient to overcome some traditional barriers to economic activity. Thus the labor force participation rate has been low and declining, with a corresponding growth in the proportion of dependents. 4.22 Second, the number of jobs created has been inadequate to absorb all those actively seeking work. Open unemployment therefore remains a serious problem, particularly for youth, although the overall rate has dropped in re- cent years. Third, structural shifts in the sectoral composition of the labor force have been relatively slow, hampering increases in overall productivity and widening intersectoral disparities. 4.23 Fourth, the wage and payments system, including the determination of rewards from self-employment, has not provided sufficient incentive to use abilities and complementary resources to the full. It has been put under additional strain by inflation and by the emigration of an increasing number of Syrians with the highest skills and experience. Fifth, nearly two-thirds of the labor force is still dependent on nonwage incomes determined by the level at which prices or trade markups are fixed by the government or the market place. Sixth, although some inequalities are still moderate in Syria, they appear to have been accentuated in recent years, and some disadvantaged groups have great difficulty in satisfying their basic needs. Let us review the evidence and the causal factors on these points. - 82 - Labor Force Participation 4.24 The ratio of dependents to labor force is disproportionately high in Syria (see Figure 4.2). Fewer than one in four Syrians is economically active --24.8 percent of the population in 1974, compared to 26.4 percent in 1964. These data are somewhat misleading as they exclude the armed forces. If male student enrollment is compared with the male population in the age group 15-39, and the disabled and those voluntarily idle are estimated, about 200,000 males remain unaccounted for in the labor force data. FIGURE 4.2: Syrian Population Economically Active and Dependants By Sex 1974 TOTAL POPULATION LABOR FORCE DEPENDENTS 10 Yrs. and Over Under 10 Yrs. Male Female Male Female Male Female Male Female 3.6 Million 3.5 Million 1.4 Million 0.3 Million 0.9 Million 2.1 Million 1.3 Million 1.2 Million World Bank -18686 4.25 The figure shows that the high ratio of dependents derives partly from the high proportion of children under 10 in the population, and also from the scant number of women who are economically active. Again, some qualifica- tion is necessary. Women do carry out certain traditional tasks in agricul- ture, such as harvesting, on a part-time basis, and many are engaged in house- hold chores such as water-carrying and certain kinds of food preparation that would be performed outside the home in higher-income societies. Nevertheless, - 83 - there is little doubt that their potential contribution to economic output is not being fully tapped. They are locked into traditional occupations by custom and by lack of educational and job opportunities in ways which might be re- garded as giving them the status of second-class citizens. Their limited occu- pational horizon tends to perpetuate the prevailing image of women in the society, which esteems their roles as mothers and understates their economic contributions. Unemployment 4.26 Despite the low female participation rate and the large number of males absorbed into the defense sector, the rate of employment creation has not taken up all those looking for work. The unemployed constituted 9 percent of the labor force in 1961. Unemployment has declined in both absolute and relative terms during the 1970s; but this decline seems to be more the result of a smaller proportion of the population seeking work than of an acceleration in the rate of job creation. Actual employment levels rose by 3.5 percent per year on the average between 1961 and 1975, little faster than the growth of total population. 4.27 Some 58.6 percent of the unemployed in 1975 were under 24 years of age. Among 15 to 19 year olds, 8.7 percent of the labor force was unemployed. These are relatively high levels considering the heavy military recruitment in these age groups. But to a large extent they may reflect the familiar phenom- enon of first job seekers spending some time looking around for available opportunities and comparing alternatives before making a choice of occupation which might determine the future pattern of their lives. In particular, there seems to be a reluctance among the young living in rural areas to follow their fathers into agriculture. Employment and Productivity by Sector of Activity 4.28 What is most striking about the sectoral pattern of employment is how slight a structural change occurred over the fourteen years from 1961 through 1975 (see Figure 4.3 and Table 4.3). The relative share of services in total employment hovered around 29 percent, while employment in manufacturing remained almost static at 12 percent of total employment. In the decade from 1961 through 1971, only agriculture's share increased slightly from 54 percent to 59 percent, however subsequently the absolute numbers engaged in agriculture leveled off and its share of employment declined to 51.1 percent in [L975. This could be a critical turning point because the ability to raise productivity and per capita incomes in agriculture will depend upon the capacity of the rest of the economy to absorb surplus and poorly remunerated labor from the land, thus providing an inducement for progressive, broad-based agricultural mechanization. - 84 - FIGURE 4.3: Distribution of the Labor Force by Economic Activity 1961, 1971 and 1975 Labor Force in 000's 2000 2 Unemployed 1800 2 Finance,Government and Other Serv. fl Mining, Manufact. & Utiliities 1600 LI Transport SCommerce 1400 U Construction ' a Aericulture 1200 1000 800 600 400- 200- C0 _ X__ __ 1961 1971 1975 World Bank -18687 - 85 - Table 4.3: LABOR FORCE, UNEMPLOYMENT AND EMPLOYMENT BY SECTOR OF ECONOMIC ACTIVITY 1961 Share 1971 Share 1975 Share Agriculture 584.0 53.5 891.8 58.6 894.9 51.1 Industry 195.0 17.9 251.5 16.5 348.7 19.9 Mining 5.0 0.5 1.6 0.1 11.5 0.7 Manufacturing 128.0 11.7 172.3 11.3 205.8 11.8 Utilities 6.0 0.6 7.0 0.4 9.5 0.5 Constructions 56.0 5.1 70.6 4.6 121.9 6.9 Services 312.0 28.6 379.1 24.9 506.0 28.9 Commerce 120.0 11.0 140.8 9.3 185.7 10.6 Transport 31.0 2.8 45.9 3.0 75.9 4.3 Finance - - 9.9 0.6 9.9 0.6 Social services 145.0 13.3 182.0 12.0 235.0 13.4 Not stated 16.0 1.5 0.5 - - - Total Employment 1,091.0 100.0 1,522.3 100.0 1,750.5 100.0 Unemployed 95.0 123.4 88.5 Total Labor Force 1,186.0 1,645.7 1,839.0 % of unemployment 8.0 7.5 4.8 Source: Table SA 1A.4. 4.29 If this process of interaction is to be prolonged and fostered there will be a need to stimulate employment expansion in those more dynamic sectors that have a higher income elasticity of demand for their products and services (that is, demand more responsive to a rise in income) than is typical for agri- culture. Construction, transport and government services have performed this role in the past. The first two may be expected to continue to do sc as a rapid growth in real demand for their services can be anticipated. But it could be argued that employment in government administrative serviceE has mushroomed too fast, without any real control over the efficiency or even the usefulness of the services provided. 4.30 Syrian economic development would become more- soundly based if in- dustry assumed its normal role as a dynamic, leading sector in both output and employment expansion. It is not for lack of capital that it has thus far - 86 - failed to play this role. The share of mining, manufacturing and utilities in gross fixed capital formation (excluding housing) between 1963 and 1973 was 37.5 percent and it has been rising. Assuming a two-year lag before capital investment gives rise to production, the sector's contribution to additional employment was only 15.3 percent. Thus, between 1963 and 1973, more than SL 41,000 at constant 1963 prices was invested to provide each job (see Figures 4.4 and 4.5). 4.31 There are indications that the capital intensity of currently planned industrial projects may be considerably higher. In some sectors, there may be little choice if the project is economically viable and oppor- tunities to substitute labor for capital are restricted by technological con- siderations, quality standards or cost. But at least there is evidence from other developing countries (such as Korea) that a rapidly expanding industrial output can be compatible with a high rate of industrial employment growth and that labor-intensive technologies and products can be highly competitive in export markets. 4.32 The alternatives need to be scrutinized more thoroughly. At the moment there is a strong bias in favor of the latest, capital-intensive tech- nology. This goes as far as a refusal of investment licenses to private sector applicants wishing to import reconditioned second-hand machinery. These policies should be reviewed. For public sector investment, social cost-benefit analysis techniques should be employed to appraise project proposals. Engineering consultants should be required to submit alternative schemes involving different levels of capital and labor intensity. Interest rate policy should be designed to set the correct price signals for both public and private investors so that the opportunity costs of capital are borne by those who use it. At present real interest rates are negative, that is, lower than the annual rate of inflation. 4.33 Measures to raise employment and reduce capital requirements in industry and transport would release the resources, thus provide the induce- ment, to step up investment in the traditional agricultural areas. This is a prerequisite if the gap between agriculture and the rest of the economy in incomes and productivity is to be narrowed. This gap has widened considerably over the past 10 years (see Table 4.4). In 1965, average agricultural labor productivity was approximately 60 percent of the economy-wide average for the entire labor force. It was less than a third of the output per worker in the finance, government and personal services sector and 47 percent of that in manufacturing. Over the next 10 years no productivity increase was achieved in agriculture, whereas it expanded rapidly in other sectors, apart from commerce. In 1975 value added per worker in agriculture was only 42 percent of the economy wide average, less than 5 percent of the level in mining, 13 percent of the transport figure and 31 percent of the manufacturing average. This is a disturbing trend which runs counter to the historical experience of the developed countries where productivity levels in the different sectors converged over time so that the agricultural labor force was as productive, or nearly so, as those in industry and services. - 87 - FIGURE 4.4: Share of Incremental Investment, Employment and Output by Major Sectors Agrilculture, and Utilities Agriculture Manufacturng 7.9. 22.1%'lo and Other Uitlities Manufacturing Agricultur andI Utilities 1 5.3% 9.6%0 .:.Transportcr 1r.a . . 18-, 2..- ,,. -7 w, ,,9,.,, ; ... e of SL 1,720. A differential of 5 to 1 between the top and the bottom salary is quite small, although those with scarce qualifica- tions can supplement these basic rates through special allowances. Engineers can obtain 60 percent extra. Technical instructors and agronomists may receive an additional 35 percent which can be increased to 65 percent for assignments outside the cities. But as this supplement is granted to anyone working more than 10 kilometers (6 miles) from the city center, it provides no real inducement to take jobs deep in the countryside. Overtime allowances are paid to technical personnel and administrators but cannot exceed 100 per- cent of the basic salary. (See also, Chapter 2, Appendix 2A, The PubLic Service.) 4.51 These various supplements were introduced in an effort to make government salaries more competitive with the rewards in the private sector and in neighboring countries. The external gap is wide and is leading to a serious brain drain. No statistics on international migration are available in Syria. The latest immigrant data from receiving countries show that there were 15,000 Syrians working in Libya in February 1977; in 1975 there were 13,600 in Saudi Arabia; 6,548 in Kuwait; and 2,447 in Abu Dhabi. If all family members are included, an estimated 300,000 Syrians are believed to have been living in Lebanon before the 1975 civil war. 4.52 Many of these people have skills which are in short supply in Syria, yet the capacity of the Syrian economy to pay comparable salaries is very re- stricted. The authorities are becoming alarmed by the magnitude and conse- quences of the outflow and there is talk of withholding educational diplomas until a graduate has spent a period of time in public service in Syri.a. Would-be emigrants fear that restrictions may be placed upon return visits to their families. The official concern is understandable, and recovery of educational costs by some form of national service is legitimate, bul: it is important not to lose sight of the long-term advantages of maintaining rela- tively open frontiers within the Arab world. Oil wealth will be more widely - C00 - distributed through emigrant remittances. Working experience will be broad- ened. Population pressure in countries with scarce resources will be eased while complementary labor will be provided to those with abundant capital. Open frontiers will also encourage a greater return flow of risk capital and official aid. And upward occupational mobility will be increased for the resident popuLation. 4.53 The best answer to this external pull would be to provide young pro- fessionals with early responsibility, performance-related financial incentives and the job satisfactions which will encourage them to use their skills in their native environment. These incentives have thus far been frequently lacking. Managers should be rewarded according to criteria of efficiency and profitability, there should be greater delegation of authority to middle-level management and shop-floor supervisors. Recruitment and promotion are influ- enced more by lineage relationships than by merit. Reform of the whole payments system and personnel practices to make payment more responsive to ability would help to stem the brain drain and improve Syria's economic performance at the same time. In addition, it would be desirable to set up an organizational structure that can manage a rotation program for migrant workers and technicians, to (i) enhance the learning of skills, (ii) supplement wages and salaries, and (iii) channel remittances into long-term productive investments rather than present consumption. Real Wage Trends 4.54 Similar considerations apply to blue-collar, craft skills. Most workers are Daid a flat time rate. The policy of rewarding employment in the public sector for social reasons has led to considerable overstaffing and little incentive to work hard. Furthermore, real wages, which rose steadily until 1973, have since been eroded by the high rate of inflation (see Figure 4.8). From 1972 to 1975, male weekly wages in manufacturing went up by 59 percent whereas retail prices increased by 63 percent. Inflation has occurred in 1976 and 1977, but the last wage increase for public sector employees was decreed in December 1975. As the major causes of inflation are to be found in the rapid expansion of the money supply to finance deficit spending by the central government, the sharp increase in bank credit and the upsurge in inter- national commodity prices, and not in a cost-push pressure stemming from wage increases, it is inequitable for the average worker to be expected to carry the burden of inflation. An incomes policy should be pursued which allows more frequent upward adjustment of wages during inflationary periods while tackling the inflation problem at its root causes. At the same time, more flexibility should be introduced into the system so that total earnings can vary more directly with individual or group productivity. The security of existing jobs and the rapid creation of productive new ones depend in the long run on improving efficiency in those sectors that are exposed to international competition for their skilled workers as well as for their products. - 101 - FIGURE 4.8: Average Weekly Wages in Manufacturing Industry Compared with Retail Price Index -/ tRil Pri Average Wages Index b/ SL/Week (1962 = 100) 100 .fi200 10 80 180 60 Wo- -160 Male Wages-Real 1 40 Female Wages-Nomsna 140 Female Wages-Real 20 L_ Re-tail Price index - 120 O 1 I I I 1 1 100 1967 1968 1969 1970 1971 1972 1973 1974 1975 a/ Based on data given for 1967, 1969, 1972, 1974 and 1975.. World Bank -18692 b/ Retail Price Index for Damascus Source: Statistical Abstract for Syria, various issues. - 102 - Medium-Term Labor Force and Employment Projections 4.55 On the basis of the UN medium variant population projections and past trends in the labor force, the total Syrian labor force can be expected to increase 2.2-fold over the last quarter of this century to reach 4.16 mil- lion. The rate of growth of the labor force is expected to accelerate from 2.6 percent during the period 1970-75 to 3.4 percent during the period 1990- 2000 (see Table 4.10). The female labor force is expected to expand faster than average reaching a maximum growth rate of 4.6 percent in the 1990's. In this projection because of the relatively low base year numbers, the female share in the total labor force is anticipated to rise to only 14.9 percent by the end of the century. Table 4.10: LABOR FORCE PROJECTIONS AND ANNUAL RATES OF GROWTH BY SEX /a Labor Force (in thousands) Annual Rate of Growth (%) Total Males Females Total Males Females 1975 1,890 1,678 212 1970-75 2.6 2.5 4.0 1980 2,183 1,925 258 1975-80 2.9 2.8 4.0 1985 2,547 2,227 320 1980-85 3.1 3.0 4.4 1990 2,977 2,580 397 1985-90 3.2 3.0 4.4 1995 3,515 3,017 498 1990-95 3.4 3.2 4.6 2000 4,161 3,540 620 1995-2000 3.4 3.2 4.5 /a Based upon U.N. Population Projections (medium variant) and national labor force data. Source: International Labour Office: 1950-2000 Labour Force Estimates and Projections (Geneva, ILO, 1977). 4.56 The sex and age composition of this projected population and labor force is shown in Table SA lB.3b. In 1975, 34.1 percent of the labor force was estimated to have been under the age of 25. By 1985, the share of this age group is projected to drop to 31.8 percent and by the year 2000 to 29.2 percent. This will largely be the result of higher educational enrollment rates. The activity rate (that is, the percentage of each age group in the labor force), is highest, for males in the 25-44 age brackets, at over 96 percent. For females, the highest expected to be attained is 17.9 percent among 20-24 year olds in the year 2000, whereas the highest currently is 11.8 percent of females between the ages of 15 and 19. This increase in participa- tion rates is based on the expectation that more females will postpone the age of marriage after receiving higher education, and will continue to work after marriage, particularly before the first child arrives. - 103 4.57 It is possible that these labor force projections may prove to be slightly high if the policy measures recommended in the section on population are put into effect. However, the activity rate of women could very well increase faster than expected in response to improved educational opportuni- ties, changing social attitudes and higher rates of employmient creation resulting from raore appropriate technology and product mixes. This would tend to enlarge the labor force. Even though it takes 15 to 20 years before popu- lation growth rate changes begin to appear in the labor force, the net result of these opposing forces is likely to be biased towards a rapid increase in the size of the labor force until the mid-1990's at least. In fact, that is the conclusion suggested by the projections based on slight modifications to the U.N. medium variant population estimates for 1975 as in Table 4.11. Table 4.11: ESTIMATED LABOR FORCE PARTICIPATION RATE BY SEX IN 1975 /a (in thousands) Male Female Total- Labor force /b 1,526 313 1,B39 Population 10 years plus 2,543 2,424 4,967 Participation rate /d 60.0% 12.9% 37.0% /a The 1975 estimates are based on applying the shares of M/F in the 1974 Labor Force (83.1 percent to 16.9 percent, based on the Statistical Bulletin of the Ministry of Labor and Social Affairs for 1975) to the 1975 Labor Force (Table SA 1A.3) and the shares of M/F in the UN medium variant population projections for 1975 (51.2 per- cent to 48.8 percent, see Table SA lB.l) to the official total popula- tion estimates for 1975 (adjustment factor: 7410/7259 = 1.0194, Tables SA 1A.3 and SA lB.l). /b Labor Force Figures include unemployed. Tc Totals from Table SA 1A.3. Td Male Female Total The adjusted participation 79.7% 17.2% 100.0% rate for the population 15-64 is: 1915 1782 3772 Sources: Tables SA 1A.3 and SA 1B.2, and the Statistical Bulletin of the Ministry of Labor and Social Affairs, 1975. 4.58 The modifications to the 1975 U.N. figures were made to reflect the fact that the U.N. medium variant population projections are already running behind officially estimated population levels (see Table SA lA.l). In addi- tion, the U.N. estimates of the female participation rates in 1975 are only two-thirds as high as the Government's estimates for 1974, which in turn are possibly underestimated as it appears that large percentages of women engaged in agriculturally related activities have not been adequately recordled in the - 104 - "registered employment" data. 1/ After adjusting the 1975 population base and participation rates to reflect official estimates (as in Table 4.11), two labor force supply projects for 1985 were made in Table 4.12 based on (i) no change in overall 1975 participation rates, and (ii) a moderate increase in overall participation rates primarily a result of increasing female participa- tion rates by 1985 for reasons cited earlier. Table 4.12: LABOR FORCE SUPPLY PROJECTIONS (i.e. DEMAND FOR JOBS) A. 1975 Male and Female participation rates assumed not to change over the next decade: 1975 1980 1985 M F T M F T M F T i. 10 year plus age group (000's) 2543 2424 4967 2908 2799 5707 3419 3309 6728 ii. participation rate (%) 60.0 12.9 37.0 60.0 12.9 36.9 60.0 12.9 36.8 iii. Labor Force Supply (000's) 1526 313 1839 1745 361 2106 2051 427 2478 B. 1975 male participation rate assumed not to change over next decade, how- ever, female participation rate assumed to increase gradually as in other countries at a similar stage of development from 12.9 percent in 1975 to 14.0 percent in 1980 and 18.0 percent in 1985: 1975 1980 1985 _ F T M F T M F T i. 10 year plus age group (000's) 2543 2424 4967 2908 2799 5707 3419 3309 6728 ii. participation rate (%) 60.0 12.9 37.0 60.0 14.0 37.4 60.0 18.0 39.3 iii. Labor Force Supply (000's) 1526 313 1839 1745 392 2137 2051 596 2647 Sources: Table 4.11 for 1975 and World Bank estimates. 1/ Amongst other things, there is evidence at present-that with the diminish- ing income in agricultural activities and the increase in opportunities available in urban areas and the dynamic industries, the male popula- tion from rural areas has been migrating to urban centers leaving many of the chores previously done by men to the women in agricultural areas. This trend has not been recorded, and is unlikely to be reversed unless there is a major shift towards high income opportunities in rural areas. - 105 - 4.59 In addition to projections of participation rates and thereby the rate of growth of the labor force supplied, employment prospects in Syria over the medium term are dependent on the demand for labor power generated by the rate of growth of GDP and productivity per worker. The basic assumptions for the latter (see Table 4.13) are 6 percent per annum growth for GDP at factor cost, to reflect the balance of payments constraint on future rates of g-rowth over the medium term (in contrast to the above 8 percent per annum growth rate between 1974 and 1976), and 3 percent per annum growth for productivity per worker. This last estimate attempts to take into account the very low 2 per- cent per annum average growth rate of productivity per worker between 1960 and 1975, and the acceleration in the rate of growth of productivity during the Third Plan period (1970-75) to 4.7 percent per annum. This acceleration reflected the capital intensive investments in Industry (Mining and Manufac- turing in particular) and the expansion of Government administration andl ser- vices, both of which are unlikely to continue at the same level or rate. Alternate labor force demand projections based on (1) a less likely 8 percent per annum growth rate in GDP at factor cost or (2) a less likely 1.5 percent per annum rate of change in productivity are also presented in Table 4.13. - 106 - Table 4.13: LABOR FORCE DEMAND PROJECTIONS (i.e. "SUPPLY" OF JOBS) /a A. Average compound growth rate of GDP at factor cost assumed at 6 percent per annum and average compound rate of change of productivity assumed at 3 percent per annum. 1975 1980 1985 i. GDP (mSL) /b 18,856 25,234 33,769 ii. Value added per employed (SL/employed) 10,768 12,483 14,471 iii. Labor Force Demand (number employed) (000's) 1,750 2,021 2,333 B. Average compound growth rate of GDP at factor cost assumed at 6 percent per annum, as in (A), and average compound rate of change of productivity assumed to be lower at 1.5 percent per annum. 1975 1980 1985 i. GDP (mSL) /b 18,856 25,234 33,769 ii. Value added per employed (SL/employed) 10,768 11,600 12,496 iii. Labor Force Demand (number employed) (000's) 1,750 2,175 2,703 C. Average compound rate of change of productivity assumed at 3 percent per annum, as in (A), and average compound rate of growth of GDP at factor cost assumed to be higher at 8 percent per annum. 1975 1980 1985 i. GDPf (mSL) /b 18,856 27,706 40,709 ii. Value added per employed (SL/employed) 10,768 12,483 14,471 iii. Labor Force Demand (number employed) (000's) 1,750 2,219 2,813 /a Disregarding "job vacancies" that result from a mismatch between labor demanded and supplied. /b In constant 1975 prices. Sources: Tables SA 1A.3 and SA 2B.2 for 1975, and World Bank estimates. - 107 - 4.60 Combining the various supply and demand projections for jobs generates a range of likely unemployment rates. In the basic case (Table 4.14), with 6 percent per annum growth in GPD at factor cost and 3 percent per annum growth in productivity per worker, the rate of unemployment will increase only moderately to 5.9 percent by 1985 if overall participatiorL rates remain unchanged, either due to no change in participation rates by sex, or due to a reduction in male participation rates (to reflect outmigration) suf- ficient to offset an increase in female participation rates. If on the other hand, the overall participation rate increases, primarily due to more rapid increases in female participation rates then the rate of unemployment could jump to an unprecedented 11.9 percent. Table 4.14: UNEMPLOYMENT PROJECTIONS FOR 1980 AND 1985 (i.e. deficit between jobs likely to be created versus those likely to be required in aggregate) Assumed Growth Rates: No change in overall An increase in overall GDP = 6% p.a.; participation rate participation rate Productivity = 3% p.a. 1980 1985 1980 1985 Labor force supplied (000's) 2,106 2,478 2,137 2,647 Labor force demanded (000's) 2,021 2,333 2,021 2,333 Number unemployed (000's) 85 145 116 314 Rate of unemployment (3)I(l)t%] 4.0 5.9 5.4 11.9 Source: Tables 4.12 and 4.13. 4.61 The other less likely combinations of the labor force supply and demand projections point to labor shortages over the medium term with or with- out an increase in the overall participation rate. This result is not: sur- prising as a slower rate of growth in productivity per worker will result in a greater demand for workers to meet a given rate of output growth. It is obviously in the interest of the society to increase overall productivity as rapidly as possible. It is also, however, in the interest of society to ensure that all those seeking jobs get employment with adequate pay. 4.62 Even though no dominant trend appears in these projections, the projections do suggest that problems are likely to be encountered in ensuring a balance between the overall rate of labor force growth (and changes in par- ticipation rates) and the overall rate of job creation (and changes in pro- ductivity rates) in the future. In particular it should be noted that if as a result of the Government's present capital-intensive investment strategy future productivity grew at the same high rates it did during the Third Five Year Plan period then a much higher rate of unemployment would be generated with or without a change in overall participation rates. This would be an ominous and undesirable development that should be anticipated and taken into account when new projects are selected. In some subsectors, there may be little opportunity to create a sufficient number of new jobs if the projects are economically viable and opportunities for labor/zapita - 108 - substitution are restricted by technological considerations, quality stand- ards or cost. However, this is not true in all cases, hence it will be necessary for the Government to look more closely into opportunities to create more jobs that are less dependent on massive capital investments, and into an overall structure of jobs that will be capable of absorbing differential growth rates and participation rates. This will necessitate the development of coherently linked (symbiotic) structured and unstructured sets of jobs in the economy, wherein the unstructured components could expand or contract elastically in response to the demand for jobs. 4.63 To maintain the labor force supply and demand balance at the aggre- gate level it will be necessary for policy makers to address the sectoral, spatial and occupational imbalances likely to be generated as a result of the implementation of the country's present development strategy and the develop- ment trends in the region. The two most obvious sources of pressures leading to labor force mobility and sectoral, spatial and occupational imbalances are the income differentials between urban and rural jobs, and the income differentials between domestic and foreign jobs. 4.64 A reduction in the population dependent upon agriculture for a live- lihood, in both relative and absolute terms, is necessary if productivity and per capita incomes are to be raised rapidly in rural areas. However, the sector cannot be allowed to prematurely lose the labor power required for development within a given set of technological and institutional constraints. The growing disparity in productivity related income levels between the sectors has already led to a reluctance among young men living in rural areas to follow their fathers into agriculture, and to an inability of the public and private entrepreneurs in the sector to attract new agriculture workers to the sector, particularly in the new agricultural frontier region of the Euphrates Valley. The outmigration from rural areas has led to the appearance of a shortage of appropriate labor power in the agricultural sector, both in the Euphrates Valley, and in the coastal zone. This trend is projected to continue. Administrative measures to alleviate these shortages, such as restricting occupational and geographic mobility (from rural to urban areas, or even out of the country), and/or enforcing relocation (from urban to rural areas) are undesirable as they tend to be inequitable in their impact and at best stop gap measures which address symptoms rather than causes. A reallocation of investment that will contribute to a change in intersectoral income is more desirable in the long run. 4.65 The present development tendencies also point to emerging occupa- tional imbalances. In particular, a shortage of appropriately trained man- agers, technicians and craftsmen is projected, compounded by a steadily increasing but uncertain pattern of emigration to other middle-east oil producing countries. This trend towards increasing the relative scarcity of managers, technicians and craftsmen compared with professional, clerical and other skilled workers constitutes a manpower imbalance which must be corrected, preferably by non-administrative means, if the current growth of productivity and output is to be maintained. - 109 - CHAPTER 4 APPENDIX 4A MANPOWER TRAINING 4A.01 The dual thrust of Syria's development strategy emphasizes the development of agriculture through greatly enlarged irrigation schemes and diversification of crop and livestock production and the expansion of the industrial sector with special emphasis on industries linked to agricu]ture and other domestic raw materials. The need to upgrade the education anid develop the skills of the workforce is fundamental to this strategy and the central role of the education/training system in overall development strategy is clearly recognized by the government. At the same time, it is recognized that social services, particularly education, must be distributed more equit- ably among the country's population. This section reviews the existing train- ing programs and the issues raised by them and concludes by suggesting ways of ensuring more equitable access to and more effective utilization of the skills and know-how required by Syrian workers and managers. Vocational Training 4A.02 Training of skilled and semi-skilled workers is undertaken by several technical ministries. These include the Ministries of Industry, Public Works, Social Affairs and Labor, Culture and National Guidance and the Euphrates Dam. 4A.03 The Ministry of Industry has a Directorate of Vocational Training which organizes training programs and administers the vocational training centers. Its activities can be grouped under three headings. First, it pro- motes industrial apprenticeship for youths between the ages of 15 and 18 who have completed a preparatory education. A contract is signed with a :public sector employer who guarantees employment for a period twice as long as the training which is normally two years, including 40 weeks spent on-the-job within the employer's factory and the remainder within vocational training centers. These centers, which in the case of Damascus and Aleppo are housed together in training complexes, cover the metal trades, electrical trades, building and carpentry, spinning and weaving, automobile repair, and indus- trial and architectural draftmanship. 4A.04 The second main function of the Directorate of Vocational Training is the organization of accelerated training for adults in order to prepare them for productive employment as semi-skilled workers. The age range is 16-35 and the basic educational requirement is primary literacy. Candidates must pass a test and personal interview and undertake to work in the field of specialization for at least twice as long as the training period which varies from six to nine months. The third type of training consists of spe- cial programs designed to assist intermediate institutes attached to other ministries by drawing upon the complementary facilities and expertise pos- sessed by the Ministry of Industry. - 110 - 4A.05 Table 4A.1 shows the output of graduate trainees from vocational training centers in the varius fields over the past six years. Table 4A.1: TRAINEES COMPLETING COURSES AT MINISTRY OF INDUSTRY TRAINING CENTERS 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 Metal Trades 216 187 234 146 253 743 Electrical Trades 24 74 90 42 61 195 Building Trades 20 20 25 23 24 87 Drawing - - - - 44 68 Secretarial - - - - - 35 Spinning and Weaving 35 50 70 59 52 126 Automobile Repair 55 115 66 65 91 80 Total 340 446 485 335 504 1,334 Source: Ministry of Industry. 4A.06 Although the numbers trained expanded rapidly last year, they still represent only a small proportion of the additional workers required in most of these fields in Syria, not accounting for wastage through migration and switching of occupations. In the public textile sector net employment has expanded by 1,400 per year over the last six years and the losses through retirement and job-turnovers have had to be replaced. Thp number engaged in building and construction rose by over 10,000 a year during the building boom from 1971 onwards. In the metal trades there is a risk of saturating the market however, as the total employment in public sector enterprises in this field was only 2,497 in 1975 and is expanding at little more than 200 a year. The proportion of trainees between different trades does not appear to be based upon any manpower planning or projections of requirements. 4A.07 The training programs of the Ministry of Industry have been hampered by shortages of instructors and occasionally of materials. The latter should be remedied by better forward planning. The former is more difficult to over- come because of the overall scarcity of skilled personnel, accentuated by migration, and because the salary structure for instructors is not competitive with private sector earnings. A good plumbing instructor for example, would receive SP 400 a month as an instructor and bring in SL 1,000 a month as a master plumber in the private construction sector. For the latter pay he would have to work 12 hours a day compared with six in a training center, and his job would be subject to greater seasonality and insecurity. So it has become a common but illegal practice to teach during the morning and to work privately as a craftsman on ones own account in the afternoon. 4A.08 The training centers try to retain their instructors by offering overtime payment of SL 8 an hour on a second training shift. These overtime payments cannot exceed 100 percent of the basic salary, however, and would still leave their best instructors short of earning opportunities elsewhere. In view of the important multiplier effect of training, it would be desirable - ill - to raise this ceiling. An alternative approach would be to provide employers (public and private) with a training subsidy which would encourage them to hire apprentices and to allow their most skilled workers to pass on their expertise to new entrants to the trade. On-the-job training of this kind would need to be advised and controlled by extension training staff attached to the Directorate of Vocational Training, who could be proviaed with generous travel and subsistence allowances as inducements. 4A.09 It is also recommended that a more direct link be established with the adult literacy programs of the Ministry of Culture and National Guidance which includes functional literacy training in collaboration with UNESCO. The effectiveness of the literacy campaign has been disappointing and the numbers enrolled in literacy classes have declined from a peak of about 18,00CI in 1973 to about 11,000 in 1975. Greater motivation would be provided to literacy trainees and instructors if a higher proportion were ensured training in specific technical skills up to a level sufficient to secure regular, semi- skilled employment. A quota of each intake into the accelerated training courses of the MOI might be allocated to those who have completed adult literacy training in the poorer rural areas, in return for a contract agree- ment to take up employment in those areas in terminating their craft training. A concerted effort by all Government departments will be necessary if the occupational and income barriers facing the illiterates are to be broken down. 4A.10 It would also be desirable to broaden the training facilities open to women who are virtually confined to the secretarial training centers at the moment (apart from rug making organized by the Ministry of Labor and Social Affairs). An "affirmative action" program in favor of women involving quota allocations for places at training centers, as a matter of necessity, could help to reduce conventional resistance to female workers among employers and the community at large. 4A.11 An enlargement and extension of the vocational training program in these ways will necessitate a larger training budget. This was SP 14,461,000 in 1976, representing only 0.03 percent of the total budget of the Ministries of Industry, Petroleum and Mineral Resources or 0.22 percent of the value added in the industrial sectors which are served by this training program. The large surplus obtained in the mining sector (which is in reality a tax imposed upon international consumers) should allow a higher proportiDn to be spent on the development of human resources which are Syria's most valuable and most durable assets in the long-term. During the present budgetary squeeze, with a lot of projects competing for reduced resources, there is a temptation to cut back severely on training activities which are felt to be not directly productive. Thus the Ministry of Labor's expansion plans for 1975-80 for the training of women to make carpets has been pruned. This temptation should be resisted. 4A.12 Tiaining for the building trades is also undertaken by the Ministry of Public Works which operates six centers for accelerated training. The centers have no premises of their own, but use existing secondary technical schools or industrial vocational training facilities. The instructors are part- time and drawn from within the secondary schools or from the Ministry of Public Works. The program suffers from the lack of a defined curriculum and no efforts have been made to introduce the desirable modular concept oE training. - 112 - 4A.13 Farmer training used to be conducted by the Ministry of Agriculture and Agrarian Reform but responsibility has recently been transferred to the General Union of Peasants (GUP). GUP has 13 District Training Centers - one in each mohafazat and one Central Training Center in Damascus. Each district center offers six courses per year on cooperative management for about 200 trainees. The most successful trainees from these courses follow a course for cooperative leaders in the Central Training Center. GUP also provides other courses for farmers in coordination with the extension service. The Ministry of Agriculture and Agrarian Reform operates two in-service training centers for its own staff. 4A.14 Training of cooperative leaders is filling an important need and tends to be more effective when run by cooperative organizations themselves. There remains ample scope to inject better farming practices into small-scale Syrian farming through training and extension work. The majority of the graduates of the agricultural colleges are employed in central government offices and have little or no contact with the farmer. The capacity of the younger and more vigorous agricultural engineers and agronomists is not being fully harnessed for the diffusion of improved methods and technologies in the traditional farming areas and is a major reason why agricultural output has lagged well behind the growth rate of other sectors. Here again, a combina- tion of financial incentives and a period of compulsory public service may be necessary to persuade skilled personnel to work full time in the rural areas. 4A.15 Overall vocational training programs in Syria would benefit from a mechanism to coordinate the activities of the various agencies involved. Its absence has led to duplication and fragmentation. There is an urgent need to establish a National Council for Vocational Training and Technical Education which should include representatives of the employers and the main ministries! agencies concerned with training activities and be responsible for (a) form- ulating a comprehensive plan for vocational training and technical education; (b) coordinating the establishment of training facilities and all skilled worker and technician programs; (c) forecasting skill requirements in the con- text of national development programs; (d) establishing skill training stand- ards, trade testing and certification; and (e) establishing a follow-up system to trace placement and performance of the graduates of all skill training institutions. Management Training 4A.16 The main institution concerned with management training is the Management Development and Productivity Center (MDPC) which was established in cooperation with UNDP and ILO in 1966. It comes under the jurisdiction of the Ministry of Industry and had a 1976 budget of SL 1.7 million. Its functions consist of running training courses for practicing managers, inplant consultancy and research into management problems and techniques. Its indus- trial engineering section has been responsible for the grading and evaluation of 80 percent of industrial jobs, in collaboration with the Ministry of Labor and Social Affairs, providing the scientific basis for the existing wage structure in public enterprises. - 113 - 4A.17 A statistical record of MDPC's activities from 1970 to 1975 is given in Table 4A.2. 4A.18 The number of course participants has fluctuated between 176 and 439 a year with a fairly even spread in recent years between general manage- ment, industrial engineering and finance/organization and methods topics. Marketing courses have been poorly attended which is a reflection of the inward-looking, non-competitive economic system in Syria during this period. Professional staff at MDPC have been as follows: Permanent with Without: University On Contract Universit:y Degree or Detached Degree Total General Management Department 4 1 - 5 Industrial Engineering Department 8 3 5 16 Financial Department 3 2 - 5 Total 13 6 5 26 4A.19 In the consultancy field, the concentration has been on industrial engineering and financial assignments. The present staff totals 26, of which over 60 percent are industrial engineering specialists. The number cf assign- ments has not been large: Field of Activity Financial, and General Industrial Organization Year Management Engineering and Management Total 1970 23 10 - 33 1971 - 25 /a 28 /c 53 1972 - 19 /a 6 /c 25 1973 2 25 /a 17 /c 42 1974 - 24 /a 16 /c 40 1975 - 24 /b 7 31 /a Mostly work measurement and job evaluation. /b Mostly job evaluation and maintenance management. /c Mostly Organization and Management. 4A.20 A detailed analysis of the training programs of the sector revealed several areas within given disciplines which were inadequately covered or not at all. Thus, the industrial engineering courses concentrated on work study and work measurement for wages purposes and recently moved into maintenance management. Areas of quality control, production control or production plan- ning have hardly been treated. There is a need to upgrade certain areas, for example, moving from industrial engineering to production management and from traditional organization and methods, to office management and improving office productivity. This would expand the Center's sphere of activities into such sectors as banking, insurance and general administration. - 114 - Table 4A.2: ACTIVITIES OF THE MANAGEMENT DEVELOPMENT AND PRODUCTIVITY CENTER, 1970-75 Type of Course Financial General Industrial / Organization Management Engineering- and Methods Marketing Total No. of Courses 1970 5 5 7 - 17 1971 2 4 5 1 12 1972 - 6 /a 9 - 15 1973 2 1 10 - 13 1974 7 7 5 - 19 1975 8 /c 6 6 - 20 Participants 1970 139 84 114 - 337 1971 30 57 82 13 182 1972 - 17 159 /b - 176 1973 35 14 204 - 153 1974 139 131 155 - 439 1975 91 90 113 - 294 Duration of Course 3 days 2 to Over 4 weeks to 2 weeks 4 weeks 4 weeks to 1 year Total No. of Courses 1970 - 13 2 2 17 1971 6 1 2 3 12 1972 6 5 1 3 /d 15 1973 9 1 3 - 13 1974 13 4 2 - 19 1975 12 4 4 - 20 Participants 1970 - 261 46 30 337 1971 95 18 31 38 182 1972 109 53 14 - 176 1973 191 13 49 - 253 1974 326 79 34 - 439 1975 149 56 89 - 294 /a Four of these courses were continuing from the previous year; number of participants quoted is in previous year. lb One course was continuing from previous year; number of participants quoted is in previous year. /c Out of eight courses offered, seven were short courses in the Critical Path Method (of Planning). /d Continued from previous year; number of participants is included in previous year. Source: Management Developement and Productivity Center. - 115 - 4A.21 Strengthening of MDPC's in-depth activities and a diversification of its sectoral coverage are necessary if it is to contribute fully to the real- ization of the industrial strategy of the government; this strategy, as reflected in the Fourth Five-Year Plan (1976-80) is based upon four main premises: (a) the implementation of some 80 projects either through the expansion of existing capacity or the location of new industrial units; (b) attempting to complement rather than compete with other industrial activities in the Arab States; (c) reduction of production costs, overcoming bottlenecks and raising efficiency and productivity; and (d) improving managerial and vocational skills which could be singled out as the most critical limiting factors in the development process. 4A.22 The present managerial cadre in the industrial sector amounts to about 10,000 person. Industrial expansion envisaged during the plan will create the need for some 2,000 additional cadres. If the financial resources for industrial expansion fall below what was originally envisaged (as seems likely), an even greater burden will be placed upon management to raise the output from available capacity (men and machines) by efficient planning, organization and control. They will need full support from their counterparts in other sectors who provide the necessary inputs and who distribute their final products to the consumer. 4A.23 Management education is provided by the faculty of commerce at Damascus University which is just embarking on a Masters Degree program in business administration. This will provide general knowledge of basic manage- ment principles, but graduates cannot be expected to walk straight into managerial responsibilities within an enterprise without on-the-job experience complemented by more specialized training in management techniques. The work of the MDPC is therefore a necessary supplement to a broadened program of man- agement education and, of course, remains the only institution in Syria which can upgrade the skills and know-how of the large body of management personnel who have received no formalized business training. 4A.24 The resources of the Center are currently too meager for it to ful- fill this role. Apart from the Director and Deputy-Director General, only about seven of the professional staff can be said to have adequate experience. The physical facilities are too restricted to allow expansion, with only two small, not very suitable, conference rooms. A cabinet level committe, meeting in 1974, recommended improvement in the salary scale of the staff in order to attract more qualified persons, and suggested that further internat:ional assistance from UNDP/ILO be sought. The salaries have been augmenl:ed subse- quently and a request for a technical cooperation project has recently been submitted by the Government to UNDP. It is hoped that this support will be forthcoming. - 116 - 4A.25 With the help of international advisors, the work of the Center could be strengthened in the following areas as a first priority: (a) Training: The Center should aim at a minimum target of 600 trainees per year for courses lasting one week or over and increase it gradually to about 800 by 1980. In qualitative terms, it should be able to cover more areas, particularly marketing, personnel and behavioral sciences. There is also a need to conduct a more thorough analysis of the training needs in public sector enterprises and to use the results to set up annual training programs. The survey could point out the feasibility of conducting common training programs for companies belonging to one organization or for conducting the training within companies of a certain size. The modular system should be adopted for supervisory training. (b) Consulting. The Center should approach its consulting acti- vities by proposing an integrated diagnostic survey first of all before tackling specific technical problems. It should be a prerequisite before undertaking an assignment that the enterprise appoint a counterpart in the organization to work on the project. After a diagnostic survey, a proposal should be made to the enterprise in writing, indicating the suggested work to be done, the estimated duration and possible starting times. To break the ground, only a very limited number of enterprises should be chosen for the approach at first, with a strong backing from their organizations and the Ministry of Industry. (c) Research. This activity is virtually non-existent at present. It should be created. Among the subjects to be examined are: (i) determination of training needs by sector and enter- prise, in collaboration with the newly formed Human Resources Planning Department of the State Planning Commission. This would have to be linked to a study of emerging job opportunities and an inventory of manpower resources so that the supply and demand for critical skills are better matched. (ii) financial analysis of enterprise accounts to allow an inter-firm comparison system to be established, a valuable control mechanism for top management. (iii) an analysis and measurement of productivity at the enterprise and sectoral levels, including a diagnosis of the factors responsible for variations. (iv) a study of the export market potential for selected products and marketing requirements in terms of quality standards, preferences, packaging, and pricing. This - 117 - research would provide invaluable guidance for the export promotion effort envisaged in the fourth Five- Year Plan - an increase in the share of exports in industrial output from 4 percent in 1975 to 11 percent in 1980. (v) research into the distribution system and a search for ways of reducing waste of perishables. 4A.26 Programs of MDPC along these lines could do much to raise the over- all level of managerial performance in Syria. But they would need to be accompanied by changes in the system by which managers are appointed, promoted, rewarded, sanctioned and generally motivated. Otherwise, improved techniques would never get implemented. Reference has already been made in Chapter 4 to some of the desirable reforms. The promotion and the earnings of managers should be made more closely related to the achievement of precise performance indicators which could be expressed in a variety of ways - output level, surplus/profits generated, cost savings, export targets, capacity utilization, productivity improvement, etc. The use of these indicators would imply either (a) granting individual enterprises and their managers greater discret:ion in pricing, choice of suppliers, hiring and firing of workers, wage determination and marketing, or (b) instituting a more rigorous system of central p'Lanning with more efficient coordination of the flow of inputs and outputs from each sector, and (c) stricter definition of the role and control over the .actions of each key actor in a unified system than exists at the moment, with appro- priate reward, and penalties, for those who succeed or fail to carry out their assigned tasks efficiently. 4A.27 Greater delegation of responsibility and a rehabilitation of the role of the middle-level managers and supervisors would be desirable. It is a common practice for the ordinary workers to go right to the top to discuss any small problem. 4A.28 The excessive reliance on committees to discuss problems could be tempered. Committees are democratic and may result in compromise decisions which balance conflicting interest groups and political forces. But without clearly established goals they can be unstructured-and time wasting. They also make the function of specialized line managers difficult to perEorm. At the same time, it is important for those responsible for management train- ing to recognize the power of existing practices which are a reflection of society's norms and accepted rules of behavior. While some change has to be introduced into a dynamic society, the more effective instruments of change are those which are adapted to existing customs to some degree, and are not simply abstract management techniques imported from an alien culture. The basic managerial problem in Syria is to find the right mnix of traditional and innovative practices which fit the Syrian temperament and socio-political system, yet equip the economy to meet the new challenges and opportunities of the volatile Middle Eastern world, and eventually the world at large. - 118 - CHAPTER 4 APPENDIX 4B POPULATION PROJECTIONS (1975-2000) 4B.01 In the period 1960-1970, between the last two official censuses, Syria's population grew at the rate of 3.20 percent per annum. As a result the proportion of the population under age 20 increased from 54.1 percent of the total in 1960 to 55.6 percent of the total in 1970. Given this struc- ture of the population in 1970, and different assumptions on the Net Repro- duction Rate for the 197-0-80 decade the Government estimated that the popu- lation will grew at the rate of 3.30 percent per annum until 1980, while the UN estimates that the population will grow at the rate of 3.17 percent per annum during the same period. As a result, the Government's population estimate for 1975 is 7.410 million, whereas the UN population estimate for 1975 is 7.259 million. 4B.02 In this report, depending on the context, different future popula- tion scenarios are projected, even though all are within the same order of magnitude. The variations depend on whether the objective is to analyze the consequences of the most likely trend or the worst trend. For the former, the medium variant UN estimates are used and for the latter the high variant UN estimates are used. In some cases, where detail and structure are not crucial to the analysis, the even higher 1975 government estimates and growth rates are extrapolated into the future. 4B.03 Selected demographic indicators highlighting the differences in the various UN population projection variants, from the UN's Selected World Demographic Indicators by Countries, 1950-2000, are presented in Table SA 1B.2. The sex and age structure of the medium variant projection only is presented in Table SA lB.l. - 119 - CHAPTER 5 REGIONAL AND URBAN DEVELOPMENT 5.01 Syrian policymakers are concerned about the rapid growth of their cities and the rate of migration from rural to urban areas, trends in conflict with the policy objectives of rural stability and of spatial development of the northeast and the Euphrates Basin. In comparison with those of many developing countries, however, the country's urban problems are not very serious. The rate of increase in urban population, for example, is relatively moderate, particularly in view of the high rate of overall population growth. The development of urban infrastructure also compares favorably with other developing countries. Even the variation in economic indicators among pro- vinces (mohafazat) is relatively narrow, but the disparities between urban and rural areas in such social indicators as infrastructure and public ser- vices are very wide and would be costly to reduce. 5.02 The size distribution and location of major towns is not unfavorable to development. The existence of two major cities, Damascus and Aleppo, and their location some 222 miles apart on a strong north-south linear axis, gives the country demographic stability and avoids the extreme centripetal forces that polarize toward the national metropolis in so-called primate economies. 1/ The desert areas of the center and the southeast give the rest of the country's spatial structure a boomerang shape that will not be inimical to development, once the basic infrastructure investment has been made to improve the poor interregional transport connections east of the Damascus-Aleppo axis. 5.03 The stress on urbanization problems in current Syrian policy is the obverse of government concern for rural stability and rural development, which is motivated in part by the need to exploit relatively untapped agricultural resources and improve rural incomes. The dominant goal of minimizing rural- urban migration is difficult to achieve, and may be to some extent counter- acted by pricing and investment policies (see Chapter 6, Resource Allocation). Moreover stopping the flow of rural-urban migration--even if possible--might have serious adverse consequences on levels of human welfare. The administra- tive structure is not well equipped to deal with regional and urban problems-- partly because regional planning is a new function and is split among several uncoordinated ministries, partly because of the shortage of both regional and urban planners (see Chapter 2, Public Administration and Figure 2B.1 Provincial Administration and Planning). There are few strong policy instrumenits in operation. Industry--public as well as private--is heavily concentrated in the large cities; interregional roads and the secondary road network in rural areas have been neglected; and in the cities housing construction is falling far behind household formation. 1/ Primate economies are those in which the process of transition from a rural to an urban-dominated economy (the process of urbanization) is at a stage where the size of the largest city (or the "primate" city) is very much larger than the size of the next largest city (or cities). This Chapter is based on the work of Mr. Harry W. Richardson (Consultant). - 120 - URBAN AND REGIONAL TRENDS IN PERSPECTIVE 5.04 The most surprising feature of urbanization trends in Syria, espe- cially in view of the very high rate of total resident population growth (3.3 percent a year) is that urban growth rates are quite moderate. Even Damascus City itself grew only at a rate of 4.7 percent in the early 1970s, possibly decelerating to 4.5 percent in the early 1970s. The provincial centers grew at a similar rate (4.5 percent in the 1960s), the district centers somewhat more slowly (3.5 percent), while the rest of the country grew at 2.6 percent a year. This is not rampant urbanization. The urban population share (defined as population living in cities with more than 10,000 population) has climbed steadily from 36 percent of total population in 1960 to 42 percent in 1970 and 46 percent in 1975, but there are few signs of a marked acceleration. The Syrian government is quite worried about the rate of urbanization, but this must be due to the threat it poses for population distribution goals. In fact, high urbanization rates are almost an obligatory corollary of economic development in low-income countries, and the Syrian rates are relatively low compared to those observed in other countries. 5.05 Syria cannot be described as a primate economy. In the urban hierarchy (ranking of towns by size), there are two major cities, Damascus and Aleppo; their combined share in the total population was only 23.4 percent in 1970 and not much higher in 1975, possibly 25.0 percent. This might increase to one-third by the year 2000. Although this figure appears high, it is not unexpected given the small size of the Syrian population and the aridity of much of the country's land area. Moreover, Aleppo's size is close to that of Damascus, and might even grow faster if the Euphrates area and the northeast are successfully developed. 5.06 In spite of extensive discussion in Syria on such urban problems of Damascus as housing, transportation, and congestion, the situation there is much less serious than in many capital cities in developing countries. Although water supplies will require major new investments in the future, Damascus has been blessed with proximity to a high spring (Ain Figeh), a supply which requires neither pumping nor treatment. The city's roads, although congested, are still viable, mainly because the number of auto- mobiles remains relatively low. The housing problem is perhaps more serious, with about a half million residents living in unlicensed (self-help) housing, a sizeable deficit in the housing stock for middle income groups, and high rents and prices, but the situation is no worse than in most developing coun- tries. Moreover, in terms of quality and amenities, the housing stock is of a high standard. 5.07 Thus at the very general level, three factors--the modest urbaniza- tion rate, the existence of two big cities, and compar-ison with the problems of the large metropolises in other developing countries--suggest that urban problems in Syria are not especially grave. This judgement should be kept in mind in assessing potential spatial development strategies. - 121 - The Urban Hierarchy 5.08 The national urban hierarchy must be evaluated in the context of the country's small population size. It is unreasonable to expect a country with an estimated 1977 population of 7.85 million to have a highly regular urban hierarchy with a balanced distribution among the size classes. In fact, the size distribution is not unfavorable to development: two major c.ities greater than 500,000 (one of which has now passed the million mark); three cities in the 150,000-300,000 class; three cities in the 50,000-100,000 size class; and a handful of cities with populations between 25,000 and 50,000 (see Table 5.1). 5.09 Moreover, the location of the cities is not inconsistent with a feasible national spatial strategy. There is a very strong linear axis running from North to South (Aleppo-Hama-Homs-Damascus continuing to Dar'a and Al- Sweida close to the Jordan border); two important coastal ports (Lattakia and Tartous) relatively close to this axis; two growing cities on the River Euphrates (Al-Raqqa and Deir-ez-Zor); and two other cities (Al-Hasakeh and Al-Qamishli) located in the isolated but resource-rich northeast. Moreover, both all the size classes and the individual cities are growing at broadly similar rates (typically between 4 and 5 percent a year) 1/, so that each part of the hierarchy is evolving in step. Although the five leading cities account for three-quarters of the urban and almost one-third of the total population, these shares are neither surprising nor worrying in view of the small size of the national population. 5.10 Table 5.1 projects the populations of the major cities through to the year 2000 on the assumption that they continue to grow at the same rate as in the recent past. This is not expected to happen (for instance, the projections assume no slackening in aggregate population growth), but the projected scenario gives an approximate idea of what the national urban hierarchy of Syria might look like in the year 2000. 2/ In spite of' the more rapid rate of growth of Damascus relative to Aleppo, the hierarchy would remain topped with two major metropolises. Two other cities would grow beyond 500,000 (Homs and Lattakia), with three others larger than a quarter- million (Hama, Al-Raqqa and Deir-ez-Zor). If these projections were realized, the national urban hierarchy would be quite manageable, without symptoms of primacy and with strong urban centers dispersed throughout the country. 1/ This generalization has exceptions, the most notable of which is the rapid growth of Al-Raqqa. 2/ The figures of Table 5.1 are reasonably compatible with projections for Damascus and Aleppo to 1985 developed at the Arab Planning Institute, Report on Preliminary Population ProJections for Syria, unpubLished report, Kuwait, February 2, 1977. - 122 - Table 5.1: POPULATION OF LARGER CITIES, SYRIA, SELECTED YEARS 1960-2000 /a (Thousands of People) Annual Census Data Estimate Projected growth rate /b 1960 1970 1975 1980 1990 2000 (Percent) Damascus 530 837 1,042 1,320 2,083 3,287 4.67 Aleppo 426 639 800 961 1,444 2,171 4.16 Homs 137 215 276 338 531 834 4.61 Hama 97 137 165 194 274 386 3.50 Lattakia 78 126 164 202 324 520 4.84 Deir-ez-Zor 42 66 85 104 164 258 4.64 Al-Qamishli 34 48 58 67 93 130 3.38 Idleb 24 35 43 50 73 106 3.83 Al-Raqqa 15 37 59 81 174 377 8.03 Al-Hasakeh 19 33 45 57 98 171 5.66 Douma 23 31 37 42 58 79 3.18 Tartous 15 30 44 58 113 219 6.87 Al-Sweida 18 30 39 48 78 127 4.98 Dar'a 17 28 36 44 71 113 4.81 /a Towns with more than 25 thousand population in 1975. /b Average annual growth rate assumed for projections, 1975-2000. Source: Adapted from Central Bureau of Statistics, Statistical Abstract of Syria. 1976, Tables 2/2 and 19/2. 5.11 However, this scenario would conflict with the outcome obtained from achieving spatial policy objectives held by the Syrian government. Such an outcome would involve a smaller Damascus and Aleppo and, if the development of the Euphrates Basin and the northeast were executed successfully, a much stronger network of urban centers (Al-Hasakeh, Qamishli, Deir-ez-Zor and Al- Raqqa) in that region. There might also be new entrants to the big city 11 league such as Dimas and Kassioun close to Damascus and possibly Tabqa near Al-Raqqa and the Euphrates Dam. Demographic Trends 5.12 Some of the major demographic differences among provinces are illus- trated in Table 5.2. The two metropolitan regions (Damascus and Aleppo) absorb 45 percent of the population, but the other provinces (with the excep- tions of Quneitra and to a lesser extent Al-Sweida) are not dissimilar in population s'ize (column 1). Moreover, although they differ widely in their degrees of urbanization, these differences have been narrowing markedly since 1960 (columns 2-4). Apart from Quneitra, only Dar'a and Tartous have urban 1/ Cities with over 500,000 population. - 123 - Table 5.2 DEM4GRAPHIC DATA BY PROVINCE Population Proportion of Proportion of Population Increase Density New Migration (000) Population in Population in (Percent) per 1960-70 as Urban Areas Core City (actual) (projected) Kilometer Percentage of 1975 1960 1970 1975 1970 1960-70 1970-80 t973 T 1960 Population Damascus a/ 1,774 60.2 69.9 70.8 57.4 45.4 48.4 98 17.5 Aleppo 1,523 49.5 53.8 57.2 48.5 37.6 34.8 95 - 3.4 Homs 629 37.5 46.4 49.6 39.4 36.2 33.7 15 - 0.2 lame 601 36.5 34.0 36.3 26.7 58.2 37.5 68 - 4.6 Lattakia 444 21.1 38.3 41.7 32.3 31.3 31.0 193 - 2. 3b Deir-ez-Zor 332 25.9 30.4 33.1 22.5 32.6 29.4 10 - 5.7 Idleb 428 15.2 22.1 23.6 9.1 15.3 24.7 70 - 9.6 Al-Rask.h 532 16.5 20.5 22.0 7.0 32.9 29.6 23 1.1 Al-Raqqa 281 8.2 16.1 25.3 15.3 36.0 34.3 13 4.4 Al-Sweida 162 24.4 27.7 29.0 21.4 40.0 37.1 29 - 6.4 Dar'a 282 13.4 14.3 14.5 12.0 38.7 49.3 76 - 2.7 Tartous 348 - 18.3 19.3 9.9 33.4 184 Quneitra 19 - - - - -- 37.5 10 -- TOTAL 7,355 36.9 43.5 46.2 38.1 37.1 40 a Data for Damascus conbine two Mohafazat: Damascus City and Damascus. b/ Includes Tartous. Sources: Central Bureau of Statistics, Statistical Abstract of Syria, 1976, by column, respectively, Tables 2.17, 217, 2120, derived from 2,2 and 3/1, 2/17 (Lattakia figure includes Tartous), 2/20, based on 2/9 (in 1960 Quneitra was part of Damascus, while Tartous was part of Lattakia. - 124 - population shares of less than 20 percent, and Tartous has probably crossed this threshold since 1975. There is little evidence that the urban population is heavily concentrated in the provincial capitals, since in only three cases (Damascus, Aleppo and Homs) does the capital's share of province population rise above one-third, in four cases this share falls between one-fifth and one- third, and the remaining cases are all below one-sixth and in some instances less than one-tenth (column 5). These data suggest a reasonably dispersed rather than a strongly polarized population distribution, especially in the light of the aridity constraints on settlement. However, the density varia- tions are quite wide (column 8), being highest near the coast (Lattakia and Tartous), at intermediate levels in the metropolitan regions (Damascus and Aleppo) and in fertile rural regions (Hama, Dar'a, and Idleb), and very low elsewhere. 5.13. The actual rates of population increase for 1960-70 and the official projected rates for 1970-80 suggest a broadly similar growth pattern for all, apart from the polar extremes of Damascus and Idleb (columns 6 and 7). The projected rates are close to past rates with the exceptions of Hama (decelera- tion) and Dar'a and Idleb (some acceleration). Although migration trends are discussed separately, it is interesting to note that most grew substantially in spite of net outmigration (column 9). Only in Damascus and Al-Raqqa did net immigration make a significant contribution to population growth. These figures suggest that, except rural-urban migration, migration within individual provinces rather than between has been the major factor responsible for the growth of the larger cities and towns. I/ Economic Differentials 5.14 Evaluation of economic differentials among regions is hampered by the lack of official statistical series giving a regional breakdown of national income aggregates or any kind of regional income data. Table 6.4 in Chapter 6 ranks the provinces according to an estimate of 1970 average per capita gross domestic product--total, in agriculture, and in other activities. The limi- tations of these estimates are described in the notes to the table and in the section on Income Distribution in Chapter 6 (Resource Allocation). Table SA llA.6 presents evidence assembled from official Syrian series on economic indicators by province. They cover the distribution of employment, house- building, electricity consumption, unemployment, municipal revenues, consump- tion, retail sales, and savings. 5.15 These data permit certain generalizations. For instance, the dominance of Damascus and Aleppo is clear. Their combined shares amount to 67 percent of manufacturing employment (72 percent in the private sector), 52 percent of government employment, 63 percent of electricity consumption, 64 percent of municipal revenues, and 58 percent of houses built in provincial centers. In terms of per capita and per household data, however, Damascus comes out far ahead, with consumption and retail sales levels much greater than in other provinces, and with a much lower "official" unemployment rate. 1/ This statement refers to migration's contribution to growth. Except in Al-Raqqa, natural increase has been much more important. - 125 - 5.16 Table SAII6 reveals a striking variation in the ratio of unem- ployed to vacancies in 1975 among different parts of Syria ranging from 1.35 in Damascus to 11.95 in Deir-ez-Zor. However, this information has to be interpreted with extreme caution. Although public enterprises and private firms emplc,Lng more than 15 people have to recruit via the Ministry of Labor employment offices, the supply measure (registered unemployed) is very incom- plete because of the "five-year rule" that has been in operation since 1975. This rule requires a worker to have lived in a province for five years before being allowed to register at an employment office. This is an explic-Lt con- trol device, along with the absence of unemployment compensation, des:Lgned to discourage inter-provincial migration. The result in this context is that the ratio of unemployed to vacancies seriously understates the unemployment situation in areas of high immigration. Of course, rural migrants still move to the big cities because they have hopes of finding work in small-scale industry, service activities or the informal sector, perhaps with the expecta- tion of graduating to the large-scale industrial sector after the five-year period has lapsed. It is also unknown how difficult it is to evade the 5-year residency requirement. Nevertheless, the 5-year rule and the lack of unemploy- ment compensation are a disincentive to migration, and this may help to explain the relatively narrow gap between the growth rates of the big cities and that of the total population. 5.17 The distribution of the labor force by sector of activity clearly varies widely from one province to another (see Table SA11A.4). In t:he coun- try as a whole in 1970, 48 percent of the labor force was in agriculture, 13.6 percent in social and personal services, 12.1 percent in manufacturing, and 9.2 percent in trade. By province, the range in agriculture spans from 5.8 percent in Damascus City to 72.6 percent in Al-Raqqa, and in manufacturing from 2.1 percent in Al-Raqqa to 20.8 percent in Damascus City. The relatively low shares of manufacturing, financial and business services, utilities, and social and personal services are, of course, merely indicators of the early stage of economic development in Syria as a whole. However, in these sectors Damascus City's share is much higher than its share in total employment (25.9, 43.6, 26.6 and 29.4 percent respectively compared with 12.7 percent for total employment). 5.18 In general, the evidence on economic differentials is not discourag- ing from the point of view of the poorer provinces, at least by developing country standards. For example, most provinces have a reasonable mix of agri- cultural and manufacturing employment. The exceptions are Damascus (much larger manufacturing) and Al-Hasakeh and Al-Raqqa (much larger agricultural), and these exceptions are easily explained in terms of the benefits of regional specialization. A much more important point is that the spread between the richest and the poorest province is remarkably narrow. For per capita con- sumption the ratio is 1.79 in the richest to 1 in the poorest province; for retail sales, it is 2.21 to 1. Chapter 6 (Resource Allocation) using its own per capita GDP estimates and Chapter 4 (Population, Employment and Incomes), using household expenditure surveys, concluded that the income differential among provinces is growing very slightly but remains relatively moderate compared to regional variations in other developing countries with comparable per capita income. - 126 _ Social Indicators 5.19 It is insufficient to examine economic indicators alone. It is now generally accepted that measurement of human welfare must embrace broader variables than income, employment, and material consumption levels. Moreover, the Syrian government's strategy is based on the hypothesis that rural-urban migration can be slowed down if the relative attractiveness of the cities is reduced by raising public service standards in the rural areas. For these reasons, some inquiry into the differentials among provinces in social indi- cators is justified. 5.20 The gaps in social indicators between Damascus and the under- developed provinces in the 1970s were very wide (see Table SA11A.7). Different provinces assumed the lowest rank according to the social indicator involved: for example Dar'a ranked lowest in the number of doctors and telephone lines; Al-Hasakeh in hospital beds, piped water supply and university graduates; and Al-Rakka in motor vehicles. These differentials are much wider than those observed for economic indicators. 1/ If migration decisions are affected by differentials in the level of social services and other public services as well as by differences in income and in employment opportunities, the task facing the Syrian government is very difficult. The problem derives not only from the magnitude of the gaps in standards but also from the fact that narrowing these gaps will be relatively costly, as low rural population density tends to raise the cost of supplying many kinds of public services. Even where the direct cost of the services themselves is no higher in rural areas, the cost of building and maintaining a network of secondary roads to improve the access of rural residents to service centers would be substantial. Interregional Migration 5.21 Migration among provinces is important not only because of its con- tribution to regional development and improvement of individual welfare, but especially, in the Syrian context, because of the stated goal of minimizing rural-urban migration. Official Syrian statistics give very few migration data. Of course, the evidence of higher urban than rural growth rates is indirect evidence of continuing rural-urban migration (on the assumption that urban birth rates are no higher than those in rural areas), but a complica- tion is the return of Syrians from abroad and the continuing brain drain. Fortunately, there is one official census series on the previous residence of the 1970 population that makes it possible to calculate pairwise net migration flows between provinces from the 1960 to the 1970 census (see Table 5.3). 1/ The opposite situation is quite common in developing countries. See O.J. Firestone, "Regional Economic and Social Disparity," in Regional Economic Development, ed. O.J. Firestone (Ottawa: Ottawa University Press, 1974) pp. 205-67. - 127 - Table 5.3: PAIRWISE NET MIGRATION FLOWS BETWEEN PROVINCES, SYRIA, 1960-70 (thousand of migrants) Percent Damas- Deir- Al- of 1960 cus Damas- Latta- es- Hassa- Al- Al- Tar- Qune:L- Total Popu- City cus Aleppo Homs Hama kia Zor Idleb keh Rakka Sweida Dar'a tous tra net a lation Damascus City -11.2 +8.2 +8.3 +11.0 +8.6 +4.6 + 4.5 +2.6 - 0.1 +3.7 +14.9 +4.5 +46.5 +101.1 +19.1 Damascus, Other +2.6 +1.9 + 1.8 +2.1 +0.8 + 1.4 +0.1 - 0.1 +4.0 + 7.8 +0.9 +35.1 + 74.6 +19.1 Aleppo -0.3 + 1.3 -0.7 -2.1 +11.0 -1.1 -30.9 0 - 0.1 +0.1 + 0.6 - 33.0 - 3.4 Homs + 4.6 +0.3 +0.6 + 0.8 +0.1 - 1.0 +0.1 + 0.4 +0.4 + 2.8 - 0.8 - 0.2 Hama +0.8 +0.1 + 4.3 -0.7 - 1.0 0 0 -0.4 + 0.6 - 15.0 - 4.6 Lattakia +0.2 + 3.2 +0.1 - 0.2 -0.2 - 0.2 -0.4 + 1.1 - 7.5 - 2.3 Deir-ez-Zor + 0.4 -4.2 - 4.6 -0.1 - 0.1 -0.1 + 0.3 - 12.6 - 5.7 Idleb -1.4 - 4.5 -0.1 - 0.2 -0.2 + 0.2 - 31.8 - 9.6 Al-Hasakeh - 0.4 -0.2 0 -0.3 + 0.2 + 3.8 + 1.1 Al-Raqqa +1.0 + 0.3 +0.2 + 0.1 + 43.5 +24.4 Al-Sweida - 0.1 0 + 0.8 - 6.4 - 6.4 Dar'a +0.1 +18.1 - 4.5 - 2.7 Tartous + 0.4 - 4.4 - Quneitra -106.8 -- bi a/ That is, total net migration into the city or province. b/ In 1960 Quneitra was part of Damascus and Tartous was part of Lattakia. Source: Adapted from Central Bureau of Statistics, Statistical Abstract of Syria, 1976, table 2.9. _ 128 _ 5.22 Table 5.3 has many interesting features. There are few examples of marked polarization in the sense of consistent inflows into any province from each other region. Al-Raqqa, obviously due to the impact of the Euphrates Dam project and Damascus region are the exceptions. Damascus City pulls migrants in from the rest of the country but simultaneously decentralizes into the surrounding area of Damascus province. Conversely, there are few examples of a "backwash" population drain apart from the special case of Quneitra, though Idleb and Deir-ez-Zor come very close. In most provinces there are both net inflows and outflows, suggesting a much more complex process than implied by polarization models. For instance, Aleppo lost net population on a substantial scale to Al-Raqqa and Damascus City but gained from Idleb. There are similar illustrations in other provinces, but in most cases the flows are smaller. Indeed, for the majority of provinces the net migration rates as a whole were quite small, possibly reflecting the influence of indirect control mechanisms such as the 5-year rule mentioned above. The only exceptions were Al-Raqqa, Damascus City and the Damascus region, which suggests that migration can have a marked impact on population growth. On the other hand, as the extreme case of Homs shows, there may be negligible net change even if there are sizeable inflows and outflows between pairs. Thus, Homs attracted people from Hama and Quneitra but lost rather more to Damascus City. Of course, since the data refer to each province as a whole, the statistics mask substantial rural-urban migration within provinces. However, it is interesting that the two provinces outside the metropolitan core that attracted net migration (Al-Raqqa and Al- Hasakeh) had negligible manufacturing but strong agricultural bases. Of course, the construction of the Euphrates Dam and the exploitation of petroleum resources had something to do with the attraction of migrants 5.23 The data in Table 5.3 suggest that the government's objective of minimizing inter-province migration is misplaced. As provinces northeast of the Euphrates are attracting net migration, this is surely fully compatible with policy goals. Similarly, the pattern of simultaneous net inflows and outflows implies that the migration process is much more complicated than predicted by, say, a backwash-polarization model, 1/ and hence will be diffi- cult to control until the determinants of the process are better understood. Finally, the high net immigration rates into the core region (Damascus City and Damascus Region) would be hard to choke off without some long-term shift in inter-provincial income, welfare and public service levels. Achieving a significant degree of convergence, not to mention equalization, in these levels presents a daunting task for policy-makers. THE FRAMEWORK OF REGIONAL PLANNING 5.24 Regional planning is very recent in Syria, dating back only to about 1971. There is a distinction between large projects, or central projects, in the planning of which there is a degree of coordination between the individual 11 Backwash, or polarization, both refer to the flow of resources towards the relatively advanced region of the economy, in close contact usually with the international economy (the "core"), away from the rest of the system made up of backward and underdeveloped regions (the "periphery"). - 129 - ministry and the Department of Regional Planning and Social Services (DRPSS) within the State Planning Commission (SPC), and small projects where DRPSS works with the local administrative bodies. In the last three years the pro- vinces have had some responsibility for local projects in such fields as agriculture, water supply, road construction, schools, public health, dams and the distribution of commodities. The SPC provides the Mohafazat. Council with guidelines (in the sense of budget allocations) which form a baLsis for the local projects. The State Planning Commission and Local Projects 5.25 The role of DRPSS in central projects is merely to offer an opinion on the alternative locations for a particular project. At the locaL level, however, the DRPSS maintains planning departments in each province which help to formulate plans for the main cities and towns. These plans may include projects in such fields as roads, housing construction, parks, water supply, surveys of rural areas, fire protection and "volunteer" (or "popular" proj- ects). The sub-planning departments are small, only thirty to forty personnel spread over the 13 provinces, though the central DRPSS has only ten profes- sionals, one-half of its projected strength according to Decree No. 280 of 1976. This decree gave the DRPSS more ambitious functions, not only the addition of services planning to regional planning, but also the task of surveying the economic potential of all provinces and analysis of population distribution. The DRPSS is only just beginning to implement these tasks, and probably lacks the staff to be able to take them very far. 5.26 To the extent that there is a specific spatial objective, it is probably the minimization of migration between provinces and the stabilization of population movements (in the sense of polarization from the periphery to the core within a province). An example of the former movement was the migra- tion of population from Darpa to Damascus after the drought of 19715; an example of the latter is the denuding of rural population in the Homs area as a result of the development of large-scale manufacture there. Given these objectives, the absence of an explicit national spatial strategy is easier to explain. Discrimination in infrastructure in favor of some towns rather than others (to the extent that it exists) is decided within the provinces rather than taking the form of, say, a national growth centers strategy. In general, such dis- crimination is frowned upon since the aim is to equalize public service provi- sion both between and within provinces. Other approaches include the attempt to build up new industries in rural areas, and the proposal to develop a "Free Zone" in Dar'a in the border area between Syria and Jordan within which handi- craft industries might be promoted. 5.27 Table 5.4 shows the planned distribution of investments in local projects by provinces for 1977. In total they amount to SL 768.5 million, of which three-fifths are for education and water supply. The most Lnteresting feature of this distribution is that the poorer and smaller provinlces have higher shares than justified by their populations. For instance, the Damascus and Aleppo combined share is less than one-third whereas their population share is about 45 percent. Conversely, four small provinces (Al-'Raqqa, Deir-ez-Zor, Al-Sweida and Dar'a) with only 14 percent of the population - 130 - received 22 percent of the total expenditures. Although these data are indicative of some degree of redistributional effort, this conclusion must be tempered with two important qualifications. First, many of the expendi- ture components are rural-oriented so that discrimination in favor of rural provinces is to be expected. Second, since local projects are a small pro- portion of total investment, the most urban provinces--particularly Damascus City and Aleppo--gain disproportionately as locations for national and multi- regional projects. Table 5.4: PLANNED INVESTMENTS FOR LOCAL ADMINISTRATIVE UNITS, 1977 (SL Thousands) Welfare and Mohafazat Agriculture Distribution Education Culture Social Affairs Damascus City - 8,000 62,000 - 5,500 Damascus 11,749 2,000 32,000 25 728 Aleppo 5,700 6,500 51,000 150 3,900 Homs 2,892 3,000 34,000 2,421 2,012 Hama 4,445 1,200 20,000 44 1,236 Lattakia 6,730 1,600 27,000 - 1,543 Deir-ez-Zor 2,340 800 16,000 2,150 696 Idleb 4,995 1,000 13,500 50 630 Al-Hasakeh 2,820 1,500 17,000 1,950 1,330 Al-Raqqa 580 1,000 6,000 - 344 Al-Sweida 1,582 600 8,000 2,785 1,695 Dar'a 5,530 1,000 12,000 1,250 585 Tartous 4,237 1,300 15,000 1,700 307 Quneitra 750 200 5,750 - 217 Total 54,350 29,700 319,250 12,575 20,728 Distribution (%) 7.1 3.9 41.5 1.6 2.7 Source: State Planning Commission. The Ministry of Local Administration and Decentralization 5.28 As in many other countries, in Syria there has been an attempt to decentralize planning functions from the central government to the local level in recent years. To pursue this, a new ministry--the Ministry of Local Administration (MLA)--was set up by Law 15 of May 1971. Until the establish- ment of the ministry, the Syrian government was highly centralized; for example, the responsibility for education in a city was in the hands of the Ministry of Education in Damascus. The Law provided the framework for the transfer of power from the center to the local councils, though so far only the first phases of implementation have been carried out. - 131 - 5.29 Within each province are four lower levels of legal entities: cities (more than 20,000 population); towns (10,000-20,000); villages (500-10,000); and rural areas. Parallel to this structure but performing a different set of administrative functions are the district (mantika) and the subdistrict (nawaha) (see Chapter 2, Public Administration). The districts and subd'-tricts exist to provide services such as doctors and teachers on an area basis where the municipalities are too small to finance such services. The number of func- tional and administrative subdivisions varies from one province to another (see Table 5.5). In total, there are 14 provinces, 391 municipalities (most of them in the smaller third and fourth grades), 51 districts, 160 subdis- tricts, and almost 14,000 villages and farms). Table 5.5: ADMINISTRATIVE DIVISIONS AND MUNICIPALITIES BY PROVINCE, SYRIA, 1975 (Number of Units in each Province) Sub- Cities Districts districts and Mimici- Province (Mantikat) (Nawahat) Towns Villages Farms palities Damascus City - - 1 - - 1 Damascus 8 21 9 194 298 65 Aleppo 8 25 8 1,415 1,376 37 Homs 5 14 6 425 504 46 Hama 4 16 5 485 601 43 Lattakia 4 13 4 442 864 29 Deir-ez-Zor 2 8 3 127 262 11 Idleb 5 15 5 403 477 40 Al-lasakeh 4 8 4 1,637 1,682 11 Al-Raqqa 1 7 3 250 989 12 Al-Sweida 2 7 3 123 48 31 Dar'a I >98 2 121 68 25 Tartous 5 14 5 508 373 29 Quneitra 2 4 2 163 147 11 Total 51 160 60 6,293 7,689 391 Source: Central Bureau of Statistics, Statistical Abstract of Syria, 1976 Mohafaza = province headed by a Mohafez (governor). Mantika (plural: Manatik or Mantikat) = district headed by a, Mudir- el-Mantika (District Officer). Nahia (plural: Nawahat) = sub-district headed by a Mudir-el-Nahia. Mokhtar (village headman) is responsible for the village and surrounding farms. Responsibility is hierarchical, except some villages are related to a Mohafaza center. Municipalities are distributed in the towns and villages of Mohafazat, Manatik and Nawahi for providing public services according to the grades of such municipalities. - 132 - 5.30 The primary responsibility of the MLA is to pursue the implementation of the 1971 Law, by defending the rights of the province against the ministries, by coordinating the works of the ministries at the local level (with conflicts resolved between the Ministers, and if necessary by the Prime Minister), by supervising the election of local councils and by ensuring that local decisions are consistent with the intent and guidelines of the Law. 5.31 The 1971 Law is still far from full implementation. As yet, func- tions have been transferred downwards from the ministries only to the province level, not to the cities and towns. Ministries affected include Agriculture, Supply and Internal Trade, Education, Culture, Transport, Communications, Labor and Social Affairs,-Housing and Utilities, Health and Industry (some functions); Tourism and Civil Defense is still in the process of transfer. Many projects, such as major roads, remain with the central government. The argument is that these are of national importance; the Euphrates Basin devel- opment is merely the extreme among a wide variety of cases. The standard rule is central direction but local implementation. If a project spans provincial boundaries but is local in nature, the province will cooperate in its planning and implementation. 5.32 How autonomous are the local administrative bodies? As yet there is a long way to go. Although the councils are elected, the Governor (Mohafez) is appointed by the President of the Republic, the Directors of the districts and subdistricts are appointed by the Minister of the Interior, and the top echelon of officials (university graduates) is appointed by the relevant Minister. 5.33 Much more serious is the lack of financial independence. Municipal revenues are derived from two basic sources: (i) the local collection of duties, mainly on trivial items (slaughtering fees, alcohol sales taxes, restaurant licences, sewage fees, etc.), and amounting to no more than one quarter of total revenue and (ii) the share of municipalities in central taxes such as the income tax, which are distributed among the municipalities by a strict formula based on registered population size. This rules out discrimina- tion in infrastructure spending in favor of certain cities or towns that might have a strategic role in regional or national spatial development. In addi- tion, there are a few supplementary sources of revenue, but these are too meagre to alter the picture. Municipalities may sell land either for real estate development or to the public sector (e.g. to the Ministry of Supply and Internal Trade for a storehouse). They may also borrow from the Central Bank (10 year loans at 4-1/2 percent, except for pure water projects when interest- free loans are given), but the total lending limit is SL 15 million for all municipalities at any one time (a doubling of this limit was under discussion in 1977). Grants from the national budget are given to the municipalities every year. The 1977 figure was SL 121 million, of which Damascus received 51 million, Aleppo 10 million, the grade 2 municipalities 15 million, leaving 45 million for the grade 3 and 4 municipalities. The shares of Damascus and Aleppo are determined by the National People's Council. The remainder is distributed by provinces by the MLA and the governors. Once the allocation to each province is agreed, the Governor has the full authority to allocate these grants among the municipalities as he thinks fit. Finally, since 1973 the - 133 - provinces, though not the municipalities, have had the power to levy an extra tax or duty for one year only, subject to the approval of the MLA and the Ministry of Finance. At the time of writing, a joint committee of the MLA and the Ministry of Finance has prepared a draft tax reform document that contains proposals for t~he transfer of some taxing powers downwards. On the expenditure side, there is less to say. The most important points are that municipaLlities are not allowed to run deficits, and that the procedure is first to identify expenditures and then to turn to the question of how revenues might be raised to finance these expenditures. The Ministry of Housing and Utilities and Regional Planning 5.34 The Ministry of Housing and Utilities (MHU) is the third ministry involved in regional planning. However, this involvement is not only recent (about two years) but is secondary to its main activities, the delivery of housing (via the General Housing Authority) and of utilities (specifically water supply and sewerage) to the different parts of the country. The MHU is technically oriented with an emphasis on architects and engineers. Urban planners per se are scarce in this ministry, and there is a parallel laLck of expertise in these areas even in the larger cities. Despite its role and orientation, there has been some recent attention given to regional planning in MHU. 5.35 This took the form of the establishment of a small bureau, called the Department of Regional Planning, as one of the five sections in the Directorate of Urban Development. 1/ As yet, this Department is engaged solely in research and survey studies, sometimes alone, sometimes in coopera- tion with other ministries. For example, it has cooperated with the Ministry of Communications in a study to explore the possibility of shifting the center of gravity eastwards and to decongest the larger cities (especially Damascus) by building a new North-South highway parallel to the Aleppo-Damascus road, cutting through the town of Salemieh. This would connect with a so-caLlled Arabic Ring Road circling Damascus on the east, south and west at a distance greater than 30 kilometers from the city. Another of its activities is a study to divide Syria into five "macroregions" based on economic function, geographical criteria, and the like (for example, one such region might be a coastal region embracing but not confined to Lattakia and Tartous). Another region would be the so-called island region (Jezireh) consisting of aLl the northeast of Syria on the right bank of the Euphrates. The Department of Regional Planning is giving this region special attention on the grounds that its economic potential, especially agricultural potential in the far northeast around Qamishliye, has been seriously neglected. Yet another example of the problems under study concerns the best way of expanding Tartous. The land surrounding the city consists largely of prime forests, so the Department is exploring an alternative of expanding well to the north of the city cn unpro- ductive land. However, since the site lies beyond the boundary of Ta.rtous province, this is a solution that was not analyzed either in the DRPSS of the SPC or in the MLA. 1/ The others are Urban Planning, Architecture, Research and Implementation. - 134 5.36 As these examples suggest, the Department of Regional Planning in the MHU is closer than any other agency to engaging in activities that would be described in other countries as regional planning. However, its impact is negligible. Its staff is very small, it operates almost at an academic level without an execution arm, and the coordination with the work of other minis- tries is partial and piecemeal. For instance, there appears to be no coordi- nation at all with the work of either the DRPSS, the SPC or the MLA. The Department of Regional Planning itself, with support from above in MHU, has been pressing for some machinery to achieve interministerial coordination in regional planning, particularly in the sense of translating the economic plans conducted in the SPC onto the spatial plane. Although the ideal location for such a coordinating agency would be in the Prime Minister's Office, this Office presently lacks the technical personnel to perform the task. ISSUES Goal Conflicts 5.37 In formulating spatial policy objectives, Syrian planners have been insufficiently aware of the potential conflicts among them and of the need to "'trade off" among competing goals. A simple illustration may emphasize this point. Goals that rank high in priority include (i) raising mass living standards; (ii) increasing the rate of economic development; and (iii) mini- mizing rural-urban migration. The last is the only spatial goal of the three, and might reasonably be treated as subordinate to the other two, although it is prominently featured in the discussions of Syrian policymakers. The just- ifications for this goal include the need to develop agriculture and negative externalities associated with rapid urban growth. These arguments are not beyond challenge: while in some areas agriculture is held back by the absence of a local population, in others the emigration of underemployed farmers would raise agricultural efficiency and local per capita incomes; the negative externalities in the large cities are counterbalanced (no one knows to what extent) by agglomeration economies, 1/ and per capita infrastructure and public service costs are lower in cities than in sparsely populated rural areas. 5.38 Nevertheless, accepting the justifications for the moment, problems remain in the form of conflicts among the goals. Generally speaking, goals (i) and (ii) are compatible especially in a socialist economy where public ownership and tax policies can avoid the risk of the benefits of rapid economic growth accruing regressively to a minority class. However, goals (i) and (iii) are in direct conflict, since rural-urban migration remains an important mechanism for the improvement of individual living standards. If public service levels and job opportunities could be equalized between urban and rural areas overnight and at negligible resource cost, living standards could be raised without migration. But the equalization strategy can be effective only in the long run, if at all. Hence, attempts to restrict rural-urban 11 Agglomeration economies are defined as the internal and external economies of scale associated with increased spatial concentration. - 135 - migration in the short run will tend to slow down amelioration of living standards. 5.39 Similarly, an attempt to achieve goal (iii) will also involve, a substantial sacrifice of goal (ii). The reason is that massive investment in rural infrastructure is a precondition for slowing down rural-urban migration, but such investment diverts scarce capital from higher productivity sectors, and the capital costs of a dispersed settlement pattern are much higher than those for a spatially concentrated pattern. 5.40 Of course, it is possible that a redistribution from the cities to the rural regions could pay off in the long run and could result in a marked deceleration in rural-urban migration. But this possible long-term solution does not provide a case for strong short-term measures to make it difficult for people to migrate from rural areas to the big cities. Such measures would deprive many potential migrants, with few prospects in their home environments, of the opportunity for individual improvement. Unless Syria wishes to follow the collectivist route (there is little evidence to suggest this), the appropriate way to reduce rural-urban migration is to alter the relative set of opportunities between urban and rural areas, not to forcibly restrict movement from rural regions to the cities. This strategy does not involve too high a cost in terms of sacrifices in improved individual living standards, though it may require some compromise (hopefully modest) in the national growth rate. Also, it is attainable only in the long run, and its likelihood of success is not helped, and may even be hindered, by the pre- mature control of migration. Location of Industry 5.41 An improved geographical distribution of manufacturing industry is a specific objective of the Fourth Five Year Plan 1976-1980. The political authorities resolutions have intermittently called for developing the backward regions by dispersing industry and for reducing the concentration of industry in the big cities. A sizeable proportion of manufacturing activity (more than two-fifths of output, and more than 90 percent of investment) is public, in the hands of six General Organizations dealing with the food processing, sugar, textiles, cement, chemicals and engineering subsectors. Ostensibly, therefore, the opportunities for pursuing a geographical dispersion of industry goal are much greater than in a market economy. However, there is little evidence that regional development objectives have influenced location decisions in manufac- turing. More than two-thirds of manufacturing jobs were concentrated in the core regions of Damascus and Aleppo in 1970 (Table SAllA.4). In 1975 three- fifths of total manufacturing employment was located in three cities (Aleppo, Damascus and Homs), while only one in six manufacturing jobs were in the rural areas. 1/ Manufacturing employment's share in total employment was well below the national average (12.1 percent) in all regions except the Damascus, Aleppo and Homs regions, and was less than one-half of the national share in all 1/ Central Bureau of Statistics, Statistical Abstract of Syria, 1976, Table 3/21. - 136 - other regions except for Lattakia and Idleb. Four out of every five public sector manufacturing plants were located in the four largest cities. 1/ 5.42 Of course, such concentration in core regions is not unusual in developing countries. The advantages of the metropolitan areas, such as better infrastructure, proximity to markets, access to skilled labor pools and the locational preference of managers, are considerable. Nevertheless, it is still surprising that the public sector's manufacturing site decisions have not been strongly influenced by interregional equity criteria in addition to the usual technical determinants of location. However, the job-creating impact of a revision in locational policy would be quite modest because of the public manufacturing sector's preoccupation with highly capital-intensive projects, especially in cement, fertilizer and sugar mills. Although this feature reflects in part the industries selected for priority development, there has also been a tendency to adopt capital-intensive techniques even in conditions offering a wide choice of technologies. 5.43 To the extent that there is a location of industry policy, its objectives are four: (i) to distribute industry more equally among the different regions of the country, as an element in the strategy to reduce rural-urban migration; (ii) to relocate industry from Damascus to regions further away for national security reasons; (iii) to promote small-scale industries in rural areas, again with the idea of holding people on the land by offering them year-round employment; and (iv) to attain a better distribu- tion of industry within metropolitan areas, by locating industries in indus- trial zones rather than at sites where they might be a source of environmental disruption. In spite of one or two successes such as the relocation of the cement factory in Damascus from the western to the eastern side of the city at a cost of SL 2.5 million solely for environmental reasons, this last objective is imperfectly developed. A notorious example is the new cement factory at Tartous. This plant, geared to the export market, is being built to the north of the city because sites to the south (though more suitable ecologically) lacked access to the raw materials and water. However, the site chosen required the destruction of a valuable forest and is quite close to Tartous itself. Also, it illustrates a serious lack of interministerial coordination since it preempted the only location between the mountains and the sea suitable for the coastal motorway that was planned by the Ministry of Communications. 5.44 Since the locations of many of the new industrial projects proposed in the Fourth Plan have not been chosen, while the ongoing projects show a heavy bias in favor of core locations such as Damascus, Aleppo and Homs, it is difficult to determine how seriously the Syrian government intends to pursue 1/ Of the 54 public sector production units, 23 were -in Damascus. However, in recent years there has been some decentralization of food processing and resource industries such as sugar, canning, groundnuts processing, onion processing, wine, cotton and pulp and paper to locations such as Lattakia, Tartous, Salamieh, Al-Sweida and Deir-ez-Zor (Volume 3, Annex 3: The Public Manufacturing Sector, paras. 3.30-3.31). - 137 - its objectives of regional dispersal of industry. The General Organizations have considerable political power that makes them difficult to bring to heel by the Ministry of Industry, and appear to rely heavily on technical and cost factors rather than social criteria or regional development goals in select- ing sites for public manufacturing projects. 1/ The private industriaL sector would appear to be much more appropriate for interregional and intraregional diffusion because it consists of a great many small firms employing labor- intensive technologies (capi4tal investment per job is not much more than SL 11,000), but it too is lheavily concentrated in the major cities, with more than four-fifths of the investment and almost three-quarters of the Jobs in Damascus and Aleppo alone (see Table SA11A.8). 5.45 This heavy concentration of small-scale private industries i-n the large cities raises the question of whether incentives might be devised to induce the private sector to play a more positive role in regional development strategies. Although private industries receive several types of assistance (such as exemption from corporate taxes for six years, relief from import duties, the supply of raw materials and intermediate goods by the public sector at moderate cost, and export subsidies), none of these measures discriminate spatially in favor of certain areas or regions selected for development. The closest approximnation to a spatial policy instrument is the system of licens- ing operated by a permanent committee of the Mi-nistry of Industry. This may be used as an instrument of locational control to promote industry ir. rural areas and small towns and to forbid it in the large cities. However,, it tends to be employed in an arbitrary fashion, with no systematic criteria used for granting or denying a licence application. Other factors besides locational objectives intervene, such as the degree of local competition. Moreover, an increasing tendency to refuse applications in the large cities does nlothing to promote the growth of industries at dispersed, especially rural locations, unless the negative controls are coupled with an incentive mechanism to induce applicants to consider alternative locations rather than merely to abandon their projects. Housing 5.46 Syria is facing a serious housing problem, particularly in the large cities. The gravity of the situation is not immediately apparent fr-om looking at the results of the 1970 Housing Census, the most recent authoritative source on housing conditions in Syria. By developing country standards, the urban housing stock is of high quality, as measured by the proportion of houses with such amenities as electricity, piped water, and baths (see Table 5.6). The lack of utilities is most serious in the rural areas, where the proportion of houses having amenities typically falls below 10 percent. The 1/ The textile industry is an example where for some branches, e.g., cotton spinning, regional development goals coincide with locational cost cri- teria. Thus, out of 15,200 jobs created by intended new projects in the Fourth Plarn, only 3337 would be in Damascus and Aleppo (i.e. 22 percent), and these were in the market-oriented segment of the industry, specific- ally garment factories. - 138 - 1970 Housing Census showed that rural housing tended to be more overcrowded than urban housing (see Table SAl1B.1). However, the availability of rural housing appeared reasonable since there were high vacancy rates and housing surpluses (in the sense of an excess of dwelling units over the number of houses occupied) in many regions. Of course, this is misleading since the immobility of houses means that a vacant house at the wrong location is the same as no house from the point of view of relieving a housing shortage elsewhere. Table 5.6: HOUSING IN URBAN AREAS, 1970 Percentage of Houses With: -- Bath Electricity Piped Water Owned Damascus combined 72 88 86 62 Damascus City 75 93 90 61 Urban areas in; Rest of Damascus 57 66 63 70 Aleppo 57 82 86 68 Homs 48 81 74 71 Hama 49 88 88 73 Lattakia 49 90 84 52 Deir-ez-Zor 65 83 85 69 Idleb 33 74 71 73 Al-Hasakeh 37 71 54 62 Al-Raqqa 32 47 76 66 Al-Sweida 28 86 87 66 Dar'a 26 74 82 69 Tartous 46 84 89 54 Quneitra a Total Urban 48 84 83 65 Rural 6 10 10 83 Total Urban and Rural 28 41 41 76 Source: From 1970 Housing Census, see Central Bureau of Statistics, Statistical Abstract of Syria, 1976, Tables 6/19 and 6/20. 5.47 The data in Table SA1lB.1 suggest that even the urban housing problem is tractable, since the vacancy rates were moderately high in many cities (and even 3.5 percent in Damascus City) while the housing deficit in 1970 was measured at less than 53,000 houses. However, such an interpretation would be wildly optimistic for several reasons. Population growth in general and household formation in particular (exacerbated by the dramatic shift from extended to nuclear families) have shot ahead of housing performance, so that the deficit has widened dramatically since 1970 (the 1975 estimate is 165,000; - i39 - see Table 5.7). The problem is particularly serious in Damascus City because of the high rate of in-migration and the burgeoning of "self-help" housing, mainly of mud bricks but also some tents. The vacancy rate is not an indi- cation of sufficient housing but rather of the fact that many owners hold housing off the market to await further increases in prices. 1/ They do not rent such houses (except to foreigners) because of rent controls (a maximum of 5 percent of an estimated--usually under-estimated--market price) and strict tenant protection rights. Building materials (especially cement and wood) and skilled construction workers (many of whom have been attracted by the high wages offered in the Gulf states) have been in critically short supply, and this has hampered the expansion of housing construction. In addition, avail- able resources (materials, manpower, credit) have been diverted out of housing into nonresidential building, especially offices. Evidence of the increase in the nonresidential share of total building expenditures, has been striking, particularly in the cities (see Table SA11B.2). Table 5.7: HOUSING NEEDS AND PLANS, SYRIA, 1975-1980 Units Housing Deficit, 1975 165, 000 Housing, Need for New Households 222 000 Total Housing Need 387, 000 Projected Housing, 1976-80 208, 000 Of which: General Housing Authority ( 40,000) Military Housing ( 30,000) Cooperatives ( 25,000) Private (113, 000) Housing Deficit, 1980 179,000 Source: General Housing Authority. 5.48 The most serious factor in the deterioration of housing has been speculation in the land market. As shown in Table SAl1B.2, despite year-to- year fluctuations, the land component of building costs has tended to increase and to be higher in the cities than in rural areas. Land prices have rocketed since 1970, and until February 1976 speculation in the land market was virtu- ally uncontrolled. A law passed at that time made two major reforms. First, 1/ The tax laws encourage the use of land (vacant land is taxed If not built on after three years) but discourage completion (unfinished dwellings are not taxed). Thus, the speculator typically holds buildings in an incom- plete form, and justifies this in terms of unavailability of materials. - 140 - it forbade purchasers of land to resell without building. Second, it devel- oped a procedure for large-scale expropriation of land at moderate prices. Agricultural land is purchased at a price which varies between one and ten times the value of the annual yield of the land, the multiplier being deter- mined by an Expropriation Commission according to various criteria. This price tends to be between one-third and one-half of what the land would sell at in a free market. The price paid for urban land must not exceed 15 percent of the price of the building that is ultimately to be constructed on the land. Already the Government has expropriated huge tracts of land (8,000 hectares) for the proposed satellite developments at Dimas and Douma. 5.49 What has been the contribution of the public sector to housebuilding in Syria, and what is its future potential? The main agency responsible for public housebuilding is the General Housing Authority (GRA) established in 1961 within the Ministry of Housing and Utilities. 1/ The stated role of the GHA is to construct low-income housing for households below an income thresh- old of SL 6,000 per annum (a level set many years ago). 2/ However, for many years it has failed to carry out this role, at least in Damascus. Instead, it has merely provided housing for households displaced by the municipality to make way for construction projects such as roads. The GHA has an annual budget agreed with the SPC and the Prime Minister (in 1977, this was SL 178 million (SL 165 million of which was for already contracted projects], much below the SL 250 million requested). Although the budgets of the GHA are theoretically allocated five years ahead in the National Plan, in practice it is negotiated year by year. the main point is that it is not a budget allo- cation but rather an expenditure ceiling. The GHA has to seek out its own funds: from the Real Estate Bank (at an interest rate of 6-7 percent); from its own activities such as the sale of land and houses; and from the Ministry of Finance (at a 9 percent interest rate). The GHA sells apartments of approx- imately 100 m2 for SL 40-45,000, and the purchaser hajs to pay 10 percent down, with eight years to pay at an interest rate of 6-112 percent. A new regula- tion introduced in 1977 makes displaced tenants eligible for a GHA house, to be rented at 5 percent of the price. In general, however, the population served by the GHA program is lower-middle rather than low-income households. 5.50 The performance of the public sector in building houses is apparent from Table 5.8. Its contribution has been almost negligible, exceeding 1,000 houses only in 1972 and in most years considerably less. The role of the housing co-operative sector has also been small, though it has increased substantially since 1974. The private sector accounts for about 90 percent of all housebuilding, but its performance has also been less than impressive. The modest increase since 1973 has lagged far behind the rate of growth of new 1/ Another important public sector housing agency is- the organization responsible for building housing for military personnel. 2/ A necessary condition for entitlement to a GHA home was not to have a home, and a "points" system was used, stressing number of children and other merit criteria. 1 141 _ households, not to mention the flow of in-migrant households into the large cities. This explains the growth in self-help housing as the only way via which poor households can cope with the housing supply bottleneck. Table 5.8: LICENSED HOUSEBUILDING IN SYRIA, 1961-75 Year Private Public Cooperatives Total Units Area (10 m ) 1961 15,621 743 45 16,409 1,305 1962 16,115 884 15 17,014 1,408 1963 16,316 668 29 17,013 1,396 1964 16,843 981 59 17,883 1,437 1965 13,024 304 306 13,634 1,087 1966 14,478 558 38 15,074 1,312 1967 12,158 678 303 13,139 1,156 1968 15,168 55 111 15,334 1,437 1969 18,594 161 350 19,105 1,955 1970 16,449 326 125 16,900 1,800 1971 16,133 972 348 17,453 1,976 1972 17,313 1,324 621 19,258 2,187 1973 16,439 352 527 17,318 1,973 1974 19,006 696 1,767 21,469 2,379 1975 18,100 350 1,920 20,370 2,253 Total 241,757 9,052 6,564 257,373 25,141 Source: General Housing Authority. 5.51 In the past two years, the government has attempted to curb the price increases of houses in the private sector, of which the most nLotable step is the indirect control of the land market mentioned above. At: the same time, there have been plans to expand the public sector, specifically the decision to switch to prefabricated building and the construction oi two factories in the Damascus region with a capacity of about 4,000 houses. How- ever, the scale of effort demanded by the public sector if the Fourith Plan housing targets were to be fulfilled is much beyond even this level. The 1976-80 target would require 40,000 GHA houses, 30,000 houses for the military, and 25,000 houses built by cooperatives, with a residual of 113,000 houses built by the private sector (see Table 5.7). In each case, but especially in the non-private sector, there is a quantum leap beyond past levels of per- formance. Even so, even if this target could be reached, the 208,COO houses built would fall far short of the 387,000 estimated housing need (eliminating the past deficit plus the demand of new households). The end result, after five years of unparalleled housebuilding activity, would be a housing deficit (179,000) in 1980 even larger than the "crisis" deficit of 1975. In view of the realization of the inadequacy of this ambitious program, a deciision has been taken to focus efforts on the big cities where the shortage is most critical. lhus, almost three-quarters of completions would be located in Damascus (88,000), Aleppo (53,000) and Homs (20,000). - 142 5.52 A crude estimate of the task facing the Syrian housebuilding sector through to the year 2000 can be made by estimating the increment of households in each planning period. The simple method used was to take the UN medium variant population (it was assumed that this would fall moderately from the present level of 5.9 to 5.7 by the year 2000) to obtain an estimate of the number of households every five years. The five-year increment in households was treated as a measure of housing need. The results are shown in Table 5.9. It should be noted that these estimates are conservative, since the UN medium variant projection series is falling behind current population trends in Syria, the assumed decline in average household size may not take place, and the analysis assumes that the targets of the Fourth Plan will be achieved. Even so, the forecasts require a doubling of this target performance in the early 1980s. If the targets slip (as is most probable), the burden on subsequent planning periods will become heavier. The overall task facing the housing sector is to build 1,691,000 houses over the period 1976-2000, a daunting challenge for a developing country with the size and resources of Syria. Table 5.9: HOUSING REQUIREMENTS IN SYRIA, 1980-2000 (Numbers in thousands) Planning Period Increase in Net Households Deficit Total 1981-1985 266 179 445 1986-1990 300 - 300 1991-1995 374 - 374 1996-2000 364 - 364 Source: World Bank Estimates. 5.53 Another aspect of the housing strategy is to combat the shortage of land and the higher construction costs by building at a distance from Damascus City itself. The projects include: a satellite town at Dimas with 75,000 units to be built by the private sector, a major expansion of co-operative housing at Douma 17 kilometres from Damascus, and the large proposed develop- ment on Kassioun mountain. Douma involves the expansion of an existing center, but Dimas and Kassioun would be new developments. As yet, neither project has been started, and both may by affected by cutbacks in the scope of the Fourth Plan. The justification for both new projects is dubious. The Kassioun project, for example, would involve SL 2,800 million (of which almost 30 percent would be for infrastructure investments) over an eight year period. The Dimas project is even more ambitious, since it is intended to be approxi- mately double the scale of Kassioun. These projects would appear to be a profligate diversion of scarce investment resources. Although it is intended that the private sector would be heavily involved, the projects nevertheless require a response from the public sector far beyond any level achieved in the past with no expectation that the managerial and technical resources are available. Worst of all, they conflict with the inter-regional redistribution objective, since the distances of the projects from Damascus City are short enough to suggest that these developments reinforce rather than counteract metropolitan concentration. - 143 - Water Supply and Infrastructure 5.54 Water supply and sewerage may be examined briefly as an illustration of one aspect of urban infrastructure. Superficially, Syria appears well served with water, in spite of the aridity of much of the country. As shown in Table 5.6, 83 percent of the urban housing stock had piped water in 1970. However, two important qualifications are the substantial number of people, especially in Damascus, living in unlicensed buildings (i.e. self-built dwellings) not recorded in the Housing Census and the low rural standards (only 10 percent of rural housing has piped water). The strategy of stabi- lizing the distribution of population dictates a policy of attempting to equalize public service levels per capita, and this in turn requires heavy investments in rural infrastructure, e.g. water supply projects in villages. In spite of this goal, 55 percent of the water supply investment program of the draft Fourth Plan (June 1976 version) was intended for Damascus and Aleppo, though 38 percent was allocated for rural areas (the other municipalities were squeezed). The original idea was to extend a public water supply (initially in the form of public taps) to all villages in the 150-200 size class (about 2,400 in total). 5.55 For several reasons this strategy is unfeasible in the rext planning period. The costs of supplying water to rural villages are, in general, approximately double those in the major towns, mainly because of the high pumping costs and frequently long distances involved in servicing a small population. 1/ Although it is customary in Syria only to charge customers the running costs for water not the capital costs, the investment cost for water of a dispersed settlement pattern is very substantial given the capital con- straints on the growth of the Syrian economy. Second, even if the problems of investment resources and finance could be overcome, the shortage of tech- nical manpower is acute (the drain of skills to the Gulf) so that the pros- pects of completing an ambitious program are close to zero. Third, there is an income level problem i-n the rural areas, particularly from the po:Lnt of view of raising water supply standards to close to urban levels. The policy is to make water available from public taps free of charge, but to impose fees once house connections are made. This is an obstacle for attaining water service levels comparable to those in urban areas until rural incomes are higher. 5.56 If water supply costs favor the large cities, the reverse is true of housing. The approximate differential for housing plus utilities is SL 1,500 per m2 in Damascus, SL 1,200-1,300 in other cities and only SL 400-500 in vil- lages. This is not a precise comparison because the village estimat.e includes only electricity and water among utilities, i.e. it excludes roads and sewage. Nevertheless, it suggests that housing goals are easier to fulfill in rural areas. 5.57 As a response to the prohibitively high costs of supporting a very dispersed rural settlement pattern, the Syriar governmenc is attempl:ing to 1/ An extreme case is the SL 1.5 per m3 involved in pumping water with three pumping stations 500 meters to Al-Sweida and nearby villages. -144 - consolidate villages around rural service centers of about 15,000 people in size- However, as yet this strategy has not had much success. Many of the villages are located in mountainous regions, where inaccessibility rules out the rural service center and satellite villages approach. In some areas, such as the Euphrates Dam region, the population is still too sparse to justify a rural growth center strategy. In other cases, local political pressures have prevented effective consolidation. A more viable prospect is the attempt to promote stable village centers relatively close to the larger cities such as Damascus, Homs, and Hama, but in the long run this will reinforce rather than reduce polarization towards the metropolitan areas. Transportation I/ 5.58 Although there are projects, either under execution or planned, 4for rail links between Deir-ez-Zor and Damascus and Homs and between Lattakia and Tartous, the road system dominates Syria's transportation demands, carrying 97 percent of both passengers and freight. Nevertheless, the primary road net- work is very imperfectly developed, and ill-suited to the needs of a rapidly developing country. The dominiant axis is the North-South artery between Aleppo and Damascus. There are reasonably good links to other countries, to Beirut, Amman and Baghdad, but the network to the center and the north-east of the country is very poor. The Fourth Plan which originally had a three-fold increase in investments compared to the Third Plan included steps to rectify this discrepancy between the West and the East by roads between Damascus and Deir-ez-Zor, new roads along the banks of the Euphrates and a critical road across Northern Syria linking Aleppo with Yaaroubiye on the north-east border. These roads are very important from the point of view of regional development, but they can hardly be justified as a response to existin traffic demand. 5.59 There has been a marked bias in road investments in Syria in recent years, with much of the emphasis going to urban roads, somewhat less stress being placed on 'nterregional roads and an almost total neglect of rural sec- ondary roads. Given stated spatial policy objectives, it would be necessary to correct this bias. The rural inhabitants increasingly demand accessibility to a nearby service town. It is only a mild exaggeration to suggest that the Euphrates valley proposals will stand or fall on whether a stable settlement pattern can be devised, and such a pattern depends heavily on an interregional road network. At first sight, the costs of providing such a network would appear enormous. However, a little investigation suggests that something is feasible at relatively low cost. For example, if a new road is built on the west bank of the Euphrates, it would be possible to link up villages to this highway by a succession of transversal roads. A crude estimate of the cost of supplying all villages greater than 2,000 population along this route with feeder roads is SL 10-15 million (based upon a cost of SL 50,000 per kilo- meter 2/ and a need for 200-300 kilometers). 1/ Background information on the transportation sector is provided in Volume 3, Annex 5. 2!/ By comparison, the minimum cost of primary roads used by heavy traffic is SL 500,000 per kilometer. - 145 - 5.60 In spite of its negligible role hitherto, the rail system shovLld be more important in the future than in the past. This is because the syste!m is being extended to link the agricultural regions of the north-east with the port of Lattakia for the transport of wheat, barley and cotton, the phosphate mines near Palmyra with Tartous and to divert some of the intercity traific from road to rail. 5.61 The administration of the transport sector in Syria is complirated by the existence of two ministries 1/, the Ministry of Communications with responsibility for roads and bridges and the Ministry of Transport (estab- lished in 1974) for co-ordinating policies for all modes and for devising a national transportation strategy and plan. One of the current problems has been a delay in the formulation of this strategy. This is unfortunate since the scale, structure and network of the transportation and communications system may play a substantive role in determining the pace of regional devel- opment, especially in previously isolated areas. Urban Planning 5.62 Using the operations of the Municipality of Damascus Planning Department as the example of "best practice" urban planning in Syria, the conclusion that urban planning is in-a primitive state is inescapable. The major problems include: (i) a stubborn attempt to implement the Master Plan of 1968 for the City of Damascus, even though the pace of events since that date means that the parameters of the Plan bear no relation to reality on the ground; (ii) a shortage of technical personnel and the spasmodic and piece- meal reliance on short-term foreign consultants; (iii) the failure to evaluate current and past projects, and the very limited attention given to efficient execution; (iv) the complete neglect of the interdependence between transporta- tion and land use planning. Although responsibility for urban transportation in Damascus lies with the Municipality rather than with the Ministry of Communications, there are no staff responsible for urban transportation policies and, indeed, no specific policies in existance. The rudimentary traffic management measures in operation have been developed by the Traffic Policy Department of the Ministry of the Interior. 1/ A third ministry, the Ministry of Industry, is responsible for pipe- lines. - 146 - (v) a predilection for grandiose, ambitious projects such as the Mount Kassioun project 1/ with insufficient attention to its implementation 2/, combined with the neglect of urgent problems such as the improvement of utilities and services for the urban poor living in "unlicensed" settlements. The Euphrates Basin 3/ 5.63 The attempt to exploit the huge water resources of the River Euphrates via the construction of the Dam and Lake Assad, the hydroelectric projects and the irrigation works for previously uncultivatable land is by far the most ambitious project in Syria. It is, of course, a very long-term project. Financed by the USSR, the dam and lake were not completed until 1973, the last of the eight turbines is not due to be finished until 1979, and the irrigation projects will extend through the 1980s at least. In the very long run, but only then, the project could prove to be a powerful instru- ment of regional development by changing the relative contribution of this area to national output, particularly a massive increase in agricultural output for both the home and export markets, and--more speculatively--by its impact on the distributions of population. In the short and medium runs, however, the results of these projects will be small, and the program will be more of a drain on scarce investment resources than a generator of new resources. This is not to argue that the projects are unjustified in the long run: the food requirements of the rapidly growing population and the critical importance of expanding exports should ensure an ultimately high pay-off. 1/ This project, planned for an eight-year time horizon assumes SL 800 mil- lion of infrastructure investment and SL 2,000 million investment in housing. The low- and middle-income component of the project includes about 18,000 homes for a population of 80,000. 2/ The projected public sector output of 2,250 houses per year is several times greater than the national output of the public sector in recent years. This situation is unaffected by the plans for prefabricated production since the Kassioun project is intended to make use of local building materials. 3/ The Euphrates Basin is merely the most important element in a more gen- eral problem--how to exploit the isolated so-called "island region" of the North-East. The region, which is demarcated by all parts of Syria on the north-east bank of the Euphrates, accounts for a high proportion of the country's resources (40-50 percent) but is relatively underpopu- lated with less than one-sixth of the population but more than two-fifths of the land area. It has several important urban centers such as Al- Raqqa, Deir-ez-Zor and Al-Hasakeh, but these are unattractive to popula- tion because they are deficient in services. The situation of the town of Qamishliye in the far North-East is even worse, partly because of its extreme isolation, partly because its considerable agricultural potential is being neglected as a by-product of the focus on petroleum extraction. - 147 - 5.64 Nevertheless, the Euphrates Basin's contribution to regional and urban development will remain limited in the foreseeable future. 1/ There has been a significant population expansion at Al-Rakka and on a smaller scale at Al-Thawra, but this has been closely linked to the implementation of the proj- ect. The more critical test is the evolution of a rural settlement pal:tern in the Euphrates Basin. There seems to be a vague idea behind policy that the settlement of the Euphrates region can somehow contribute to relieving the pressures on the cities. Whether thought of in terms of a reverse urban-rural migration or as an alternative opportunity for would be rural-urban migrants, this notion is largely illusory. The population density remains very low (0.70-0.75 persons per hectare), the region lacks basic infrastructure even near the "model" state farm in the Maskaneh region, and the area has hitherto proved unattractive to migrants, especially to the farming population of the relatively overpopulated coastal agricultural belt. Since the agricultural sector as a whole remains short of labor, much of the problem lies in the fact that there is insufficient population pressure in the ccuntry as a whole to induce people to the "frontier" region of the Euphrates Valley. Moreover, residents in urban areas have become too accustomed to the level of public services obtainable there to consider the primitive infrastructure provisions of the Euphrates region. 5.65 From the point of view of settlement strategy, there are two options available to the Syrian government, which are not mutually exclusive. The first one is to lower expectations of what can be achieved in terms of popula- tion settlement and to plan for a highly capital-intensive agriculture. The second is to develop a comprehensive settlement strategy for the region, including the provision of urban infrastructure, a high level of public ser- vices and a secondary network on the one hand and the offer of substantial financial incentives to immigrants on the other hand. Both approaches are very costly in resources. Tne first has the advantage that, if it could be afforded, it would work. The second is much more socially and polit-ically acceptable, but the risks of failure would remain high even after substantial investments in infrastructure and expenditures on relocation assistance. 5.66 Policies implemented so far fall short of an adequate test of the second strategy. The state farm pilot project is unlikely to attract workers with any alternative since the wages are low (SL 8-12 per day) and the living conditions poor (housing is provided but not in the context of a,settlement, either physical or socially; at the time of writing, electricity has yet to be installed). Perhaps the most feasible approach would be to subject the population settlement strategy to an adequate test, via yet another pilot project; the optimal conditions for this might include: (i) the construction of a village in the full sense, with roads, electricity, piped water, village center, shops and social and cultural services; 1/ For a discussion of the technical problem that the Government faces in the development of irrigation in the Euphrates Basin, see Chapter 7, paras. 7.25-7.27. - 148- (ii) linking this village to the main highway by a high-quality secondary road; (iii) offering immigrants ownership of land but providing them with extensive technical assistance--this implies the cooperative rather than the state farm model; (iv) making substantial inducements available to in-migrants, including not only land gifts but relocation assistance, housing subsidies and "start-up" financial assistance in farming (low-rent machinery hire, credit for seed and fertilizer, etc)-; (v) offering substantial incentives for higher productivity rather than using the immigrant as a "captive" and passive instrument for implementing a centralized agricultural plan. 5.67 This approach would be too costly to replicate over all the Euphrates Basin and it probably demands some compromise with ideological goals. However, it would be an effective test of whether a rural settlement strategy in the Euphrates could ever work, short of either direction of labor or a collectivist approach following the Chinese model. Tourism and Regional Development 5.68 Primarily because of its ancient history and culture, Syria has some prospects for tourism. The sites of Roman and other civilizations, the mosques, Arab palaces and citadels combine with some tourist potential on the Mediterranean coast to offer the possibility of mixed cultural/resort holidays. Although the number of foreign tourists has increased in recent years, the total remains small. Current projects include the opening up of a major hotel chain at various locations throughout the country (the Air France chain of Meridien hotels), and the development of some recent facilities on the coast. There is no doubt that the scope for tourism could be increased, and it probably will be. 5.69 There are two important qualifications about recommending this as a course of action. First, the economic and social benefits of tourism have to be kept in perspective. Although tourism can be an important export service, the import content of hotel construction and fixtures and tourist infrastruc- ture generally must be watched. Also, care should be exercised about the degree of foreign ownership of hotels and a fortiori on the remittances over- seas of profits from tourism. Moreover, a high degree of dependence on tourism (hardly at present a serious risk for Syria) can inject volatility into the balance of payments either in conditions when-overseas travel drops or when demand switches to newer or cheaper tourist countries. Apart from the balance of payments impacts, the economic consequences of tourism tend to be less favorable than its protagonists suggest. Tourist multipliers are usually low, seasonal fluctuations can be irksome, the infrastructure for tourism may eat up scarce investment resources, and in many cases it has proved difficult to keep tourism and rural life in balance. Perhaps the best argument for - 149 - more tourism in Syria is a more general public relations viewpoint--to increase knowledge about Syria abroad with the possibility of secondary and indirect "benefits" in the form of foreign investment. 5.70 Second, the most critical disadvantage of tourism in Syria from the regional development point of view is that its expansion would probably rein- force the economies of the major cities. Apart from the purely resort: holi- days on the coast, most of the country's tourist attractions are either to be found in Damascus and Aleppo or are accessible to one of those cit:ies by day trips (e.g. Palmyra, Bosra, Hama). Thus, in the Syrian case a major expansion in tourism would probably conflict with spatial policy objectives. RECOMMENDAT ION S Regional P lanning 5.71 Regional planning in Syria merely consists of a degree of local control over small-scale projects. There is no regional planning in the sense of spatial disaggregation of the national plan or in the form of a decision framework for altering the allocation of resources among different regions. Yet such a component is needed if policy objectives are to continue to stress an improved geographical distribution of industry, a better urban-rural balance and priority towards the underdeveloped regions. To remedy t:his omission the following recommendations are suggested: (i) The introduction of a macroregional planning dimension into the planning process, in which the economy is subdivided into five or six regions. This regionalization scheme would be used for technical purposes, i.e. the spatial disaggregation of the national plan, to explore the geographical tmplications of planned investments. Each region would be aggregated from, whole provinces (mohafazat), since these administrative regions must be retained for implementation purposes. (ii) The explicit use of regional capital budgets, i.e. a .omprehen- sive classification, and subsequent aggregation, of a'll invest- ment projects (both "central" and "local") by province, as an information aid to attempts to improve the redistributional content of the Plan. (iii) The introduction of a long-term (say 15-25 years) spatial planning component into the national plan. This should be developed in time to be incorporated into the Fifth Plan (1981-85). The justification is that planning from one five- year planning period to the next is too myopic for the effec- tive implementation of spatial redistribution measures. Running five-year national and sectoral plans and louger-term spatial plans in tandem presents no serious organizational difficulties. - 150 - (iv) The development of some regional planning co-ordination machin- ery, probably in the Prime Minister's Office. At present, the limited regional planning functions are diffused among several ministries, especially the State Planning Commission, the Ministry of Housing and Utilities and the Ministry of Local Administration but also among other ministries such as Com- munications, Industry and the Euphrates Dam. There is a very low degree of co-ordination among public agencies, and this would severely hamper attempts to strengthen regional planning functions. (v) Steps to increase the number of trained regional (and urban) planners and to improve the quality of their training. (The Planning Institute has occasionally run regional planning "streams" in its program, but it gives most emphasis to national, financial and industrial planning.) Regional Policy Instruments 5.72 Instruments for changing the spatial distribution of population and economic activity are either weak or non-existent. The design of effective policy instruments is difficult because they have to be compatible with the institutional environment of the country. Hence, the recommendations made here are general rather than specific. (i) In view of the policy objective to control the growth of cities and to stabilize the rural population, a first but important step is to abandon the "implicit" subsidies to the big cities. These subsidies include a large share of public industrial projects (i.e. those under the control of the General Organizations), disproportionately high fiscal appropriations and priority in transportation investments and infrastructure. Even in the absence of measures to promote rural areas, the abandonment of these implicit spatial policies would tend to reduce rural-urban migration. (ii) The private manufacturing sector is small in terms of invest- ment (7 1/2 percent of the total) but it is very cost-e fective in terms of job creation (the capital cost per job is only 4 percent of that in the public sector). Also, it is difficult to develop efficient small-scale industrial enterprises within the public sector. Thus, measures to promote the growth of industry in rural areas and small towns should include a locational incentive system for private industry. This might include area-specific (rather than general) tax rebates and loans. In addition, the licensing system of the Ministry of Industry could be used in a more spatially discriminatory way to favor the less developed areas. (iii) A more general implication of (ii) is the need for measures to promote labor-intensive technologies in manufacturing - 151 - and other sectors, partly to relieve investment constraints partly to alleviate the labor absorption problem. Although there are shortages of many types of skilled labor in Syria, and the unemployment problem is less serious than in many developing countries, there is a general need for more jobs, especially in the rural areas where underemployment is rife. This recommendation applies both to urban and rural areas. (iv) As yet, very few families have been attracted to the fertile areas near the Euphrates or the far North-East. The insti- tutional arrangements are.probably important, with the system of ownership of land in a cooperative framework likely to be more enticing than the state farm concept. However, a successful strategy will also demand the provision of sub- stantial incentives to encourage the rural redistribution of population from low-productivity or relatively over-populated areas. Such incentives might include free land gifts, reloca- tion grants, credit for seed, fertilizer and equipment, and technical assistance. (v) Evidence, though sketchy, suggests that the costs of infra- structure (water supply, electricity, access roads) are high for small rural settlements. A cost-effective settlement pattern for rural areas will necessitate a high degree of selectivity in areas receiving infrastructure. In particular, it will be necessary to concentrate investments on rural service centers larger than the average village, partly to secure-scale economies in infrastructure, partly to provide quasi.-urban services at a level roughly comparable to that prevailing in larger towns. Even in this case, however, a secondary road network will have to be built to link nearby villages to the main service center. This approach, a ruraL growth center connected to satellite villages, offers a much better prospect of developing a viable rural settlement pattern than randomly distributed small villages. Housing 5.73 The housing situation is critical especiaily in the large cities, and property market speculation has been endemic. Strong action is needed on several fronts: (i) measures to raise the capacity and efficiency of the General Housing Authority so that it can improve its efforts to provide public sector housing. Such measures would demand inter alia more financial resources, training programs for construction iworkers and better supervision and management; (ii) a rieduction in public housing quality and costs so that low- income households may be helped (the recent activities of the General Housing Authority have been confined to rehousing population displaced by the Municipality); - 152 - (iii) government assistance to lower income households to enable more of them to participate in the private housing market. Such assistance might include provision for smaller down- payments, lower interest loans and longer repayment periods; (iv) reform in the tax laws to inhibit property market speculation and to make it unprofitable for people to hold semi-finished houses off the market. Appropriate measures might include taxing properties after a prescribed time has elapsed from the beginning of construction and a substantial capital gains tax on property sales. (v) the deferment of projects such as the Dimas and Kassioun schemes on the grounds of their high cost and failure to reach "target" low-income groups; (vi) recognition of the permanence of "unlicensed" settlements in Damascus and other large cities, and the allocation of funds to improve the level of utilities and services in the settlements, to make sites available for "self-help" housing and to provide technical assistance to low-income households in self-help con- struction techniques. The. appropriate methods for achieving migration objectives should not include making housing and living conditions intolerable for new urban migrants. Urban Planning 5.74 (i) There appears to be no urban planning profession in Syria. Professionals exercising planning functions tend to be either architects or engineers. The planning departments, even in the larger municipalities, tend to be small and overworked. If Syria is to cope more effectively with the problems of urbanization, this situation must be remedied. Of course, this requires resources and training facilities. (ii) An urban transportation strategy should be developed for Damascus and other large cities to deal with their traffic problems. This strategy should be based upon an appropriate mix of expanding the capacity of the transportation system, more public transportation services and better management of traffic circulation and control. (iii) Urban planning practice in Syria places heavy emphasis on the formulation and implementation of master plans. However, the master plan concept is too inflexible for a developing coun- try where urbanization is very rapid and where parts of the metropolitan area grow spontaneously (e.g. the unlicensed settlement phenomenon). It is virtually impossible for a master plan to keep up to date with the pace of events. Urban planners in Syria should be trained to cope with cur- rent and anticipated pressures rather than perceiving their role in terms of attempting to implement an obsolete master plan. - 153 - Other Recommendations 5.75 Fiscal decentralization should be extended beyond the provinc ial (mohafazat) level to second-grade municipalities, in order to improve 3 ocal inputs into planning decisions, to create more flexibility for towns that wish to expand (provided that expansion is consistent with national spatial objec- tives) and to improve the efficiency of implementation of local projec'ts. 5.76 Regional development criteria should influence decisions about interregional and intraregional transportation investment priorities. For example, roads should be built in order to open up priority regions, not necessarily investing first on high density routes. Moreover, the spatial policy objectives have little chance of success unless more resources are devoted to the construction of a secondary road network, especially in the Euphrates basin. 5.77 A national spatial strategy with, say, a twenty-year-plus time horizon should be developed, so that spatial policies are implemented cohe- sively rather than piecemeal. The strategy should be sufficiently specific to provide a "desired" scenario of the national urban hierarchy and the inter- provincial distribution of population and economic activity by the year 2000. This should be compared with the "most likely" scenario in the absence of effective policies to determine the degree of spatial intervention needed to c-onvert the "most likely" into the "desired" outcome. 5.78 Although the benefits of an expansion in tourism are smaller than is often implied, attention should be given to the problem of how the exploi- tation of Syria's considerable tourist assets can be made compatible with spatial policy objectives. This recommendation implies a focus on ccastal resort development rather than "cultural" tourism whieh probably reinforces the economies of the big cities. 5.79 The goal of reducing inter-provincial migration, especially from rural to urban provinces, should not be promoted by direct restrictions on mobility, since these would be inimical to the improvement of individual welfare, but rather by the gradual process of changing the distribution of infrastructure and relative opportunities between rural and urban areas. Also, the high opportunity costs involved in bringing about such chaiages should be recognized. - 154 - CHAPTER 6 RESOURCE ALLOCATION, PRICING AND INCOME DISTRIBUTION 6.01 Syria's desire to build a greater degree of central control in economic management is in apparent conflict with the limited efficacy of the institutions designed to achieve it. This is nowhere more evident than in resource allocation and pricing. Since the early 1960s the Syrian Govern- ment has aspired to the development of centralized instruments for a degree of government intervention akin to that in the centrally planned socialist economies. Centralized planning and control of investments, the national- ization and specialization of the banks, government ownership of more than 50 percent of industry, and central price control are the vehicles for this intervention, and dominate major resource flows. A complex of ethnic, social and political factors, however, militates against the early adoption of a totally socialist economic system. Impeded by a critical shortage of suitably qualified manpower, the centralized instruments are often neither intended nor formally structured to operate as they would in a fully centralized economy. The result is that there is a lack of precision in economic management, a lack of definition in the role of some institutions, and apparently a severe degree of inefficiency in resource use. 6.02 Central economic management is a fact, but its full and effective development remains an aspiration. The state controls two-thirds or more of national investment and upwards of 50 percent of industrial production; its intervention in the economy is thus the major influence in determining the level and direction of economic activity. It is questionable, however, whether economic and social goals are being pursued with the required con- sistency and efficiency. Improved resource allocation and improved efficiency in resource use should lead to more growth and less inequality. In pursuit of this goal, the Syrian authorities are seeking improvements in three major areas: (a) planning and investment allocation; (b) the role of the banks; and (c) pricing policy and procedures. PLANNING AND INVESTMENT ALLOCATION 6.03 The principal instrument in the investment allocation process is the national five year plan, which incorporates all major public investment projects. Private sector investments are regulated but lie outside the plan; since they account for about one-third of total investment, they remain important, but public sector control of investment is clearly dominant, through the plan and through a virtual monopoly of the resources to finance it. In the decade from 1966 through 1976, investments authorized in the central government budget were equivalent to from 56 to 74 percent of total investment -- that is, total gross fixed capital formation in the public and This Chapter draws upon the work of Mr. Ian M. Hume (Consultant). -155 - private sectors as estimated by the Directorate of National Accounts (see Chapter 11, Table 11.2). 6.04 In principle, this should provide the central authorities with the means to exert considerable impact on the direction of resource flows in pursuit of specific global or sector growth targets and to correct the distri- bution of income by region or by target group. In practice, however, it is questionable whether the instrument of central control of investment is used in this way, even in broad strokes, let alone with any degree of precision. As the discussion of development planning in Chapter 3 has shown, the elabora- tion of the plan is essentially a process of aggregating a set of projects. Project appraisal -- if any -- and approval derive from a variety of unsys- tematic criteria. The planning authorities (at the final stage, the Supreme Planning Council) may control investments by dint of office, but built-in control mechanisms in the system of planning and project preparation that might assist the authorities in appraising projects or matching them to systematic investment criteria and specific goals are largely absent or at best weak. 6.05 Thus the intervention of central control which has removed two- thirds of all investments from the profit regime, that is, from the need to earn a minimum return on capital, has not been matched by the development of a commensurate alternative system of production and efficiency indicators. In this situation at least three fundamental questions arise regarding re- source allocation: (a) Whether plans are consistent with keeping aggregate investment in balance with available savings; (b) Whether policy decisions have the desired impact on the direc- tion of resource flows by region, by sector of activity, and by target group; and (c) Whether resource allocation promotes efficiency within a given sector. Balance of Investment and Savings 6.06 As Chapter 11 (Fiscal and Monetary Policies) makes clear, a major cause of monetary instability in the Syrian economy has been the pursuit of investment objectives beyond the level of assured financial resources. This is partly because financial controls on those who make investment decisions -- the central authorities -- do not operate stringently. Financial planning in the sense of striking a "synthetic" balance between physical investment plans and financial resources available is at present only in its infancy, in Syria. 1/ Since the central authorities (the Ministries and the Supreme 1/ Synthetic planning, in socialist terminology, refers to aggregated quantities expressed in money values, that is the monetary valuation "synthesizes" the physical quantities. To develop such an apiroach was apparently one objective of the reorganization of the State Planning Commission undertaken in early 1977, but the Directorate charged with developing the new approach (with four staff members) was clearly under- manned, as are most others in the SPC. - 156 Planning Council) who monopolize the physical investment plans also monopolize investment resources, there are no external mechanisms -- automatic to the process of allocation -- to restrain the aggregate level of planned activity. As foreign aid -- some of it on highly concessionary terms -- has become more readily available from various sources the tendency has been to introduce investment projects in advance of the final procurement of financial resources for their implementation, often with the result that projects have had to be financed by inflationary domestic credit creation. 6.07 By stimulating inflation, government-sponsored overinvestment serves to contradict directly the governmient's policy objective of maintaining a low and stable cost of living.- As the authorities have direct and complete con- trol over some two-thirds of total investment there is no fundamental reason why this distortion cannot be removed by giving greater attention to restrict- ing the aggregate level of investment to equal the level of known available financing. What is needed to achieve this is improved financial planning. Direction of Investment 6.08 Evidence that regional and urban-rural income disparities may have widened somewhat in recent years (see Income Distribution, this chapter), suggests that centralized control of investments may not have been used to best effect in the pursuit of equity. The question is whether a different distribution of investment among sectors -- principally between industry and agriculture -- and among different regions might provide for greater equity without sacrificing growth in production. Changes in investment alone cannot guarantee changes in the structure of incomes of given groups, but the evidence suggests that, for example, there is scope for boosting the share of investment going to agriculture as the single most important means of promoting greater equality of incomes. Clearly this would also have an,impact on some (though possibly not all) regional and rural-urban income disparities. There is also scope for improving the relative proportions of such factors of production as capital and labor implicit in the investment pattern; the present pattern reflects the absence of strong links between the cost of capital, product pricing, and target returns to investment. Given also that improved effi- ciency could economize investment resources (see Efficiency of Investment, this Chapter) the suggestion is that Syria could achieve more equity as well as more growth through a better ordering of investments. 6.09 In the 12-year period from 1964 through 1976, the share of invest- ment going to agriculture was stagnant or declining except in the two years 1969 and 1970 (see Figure 6.1). From 1970 through 1976 in particular there appears to have been a decline in agriculture's share of investment at a rate significantly more rapid than the decline in its share of production. Converse to this was the trend in industry; the rise in its share of investment con- siderably outstripped growth in its share of production. Even allowing for some expected degree of increasing capital-intensity in industry and for an inevitable decline in agriculture's share of production as the country indus- trializes, it may be questioned whether the trends shown in the figure do not - 157 - also reflect some distortion of investment allocation in terms of the optimal pattern based on comparative advantage. 1/ FIGURE 6.1: Share of Agriculture and Industry in Total Investment and Production Percentage 1964-76 Shares (in Constant 1963 Prices) 50% INDUSTRY 40% - Investment 30% / Production 10% {ll 40% AGRICULTURE 20%c/~~_ 10% I Ion 1964 1966 1968 1901972 1974 1976 Source: Statistical Appendix Wor d Bank -18694 6.10 The data show clearly that the major shift to emphasis on indus- trial investment undertaken by the present government since 1970 has not brought any significant increase in industry's share of total production. While the implication cannot be drawn from this that somehow investment is more "lefficient" in agriculture (see next section), it seems likely, that a marginal reallocation of investments to agriculture from the large share now going to industry would boost total production and improve the equality of incomes. 1/ Capital-intensity is defined as the proportion of capital usage, in relation to labor usage, in a given technique of production. A country is said to have a comparative advantage in the production of those com- modities which it can produce relatively more efficiently (at lower cost), in comparison to other commodities. - 158 - 6.11 For the sake of illustration it is possible, using roughly magni- tudes prevailing in the mid-1970s, to calculate the probable impact of such reallocation. For example, if SL 100 million of investment was shifted from industry to agriculture and incremental capital/output ratios (ICORs) 1/ are of the order of say 1.8 in agriculture and 2.6 in industry (see Chapter 3, Table 3.2), then this shift of resources would imply a loss in industrial production of some SL 39 million but a gain in agricultural production of around SL 56 million, a net gain to national production of some SL 17 million. As this would accrue to the poorest sector in the economy, such a shift would also serve the goal of equity. Moreover considerations of comparative advantage, natural resource exploitation and foreign exchange earning potential would seem in themselves to argue for a higher priority in resource allocation to agriculture than is evident from the investment pattern of the mid-1970's. 6.12 With regard to investment allocation among regions, there is little to advance upon the discussion given in Chapter 5, as investment data are not available by province (mohafaza). The Fourth Five Year Plan (1976-1980) does contain explicit reference to the location of industry and a regional planning unit exists in the State Planning Commission (SPC). Although it seems unlikely that regional criteria rank high in the process of investment decisions, there is evidence that in the mid-1970s the pattern of investment has had some degree of corrective influence in this respect. If growth in employment is used as a crude indicator of the growth in investment and activity during the two years 1974 and 1975, the following pattern emerges: Urban Areas Damascus Rural Areas Syria, Homs and Agri- Total Aleppo Other Total culture /a Total employment in 1975 (thousand people) 1,750.0 417.0 252.0 1,081.0 854.0 Total employment in 1973 (thousand people) 1,612.0 386.0 224.0 1,002.0 810.0 Growth during 1974-1975 (thousand people) 138.0 31.0 28.0 78.0 44.0 (percent per year) 4.2 3.9 6.1 3.9 2.7 /a Exclusive of agriculture in urban areas. Source: Central Bureau of Statistics, Statistical Abstract of Syria, 1976, Table 14/3. 1/ ICOR is defined as the ratio of investment to the associated change in output. - 159 - 6.13 So short a time period as two years can clearly not provide aL basis for strong assertions, but these data do suggest that investment allocation has been corrective in at least two respects: (a) employment in the smaller urban centers has grown more rapidly than in the major urban centers (Damascus, Aleppo, Homs); and (b) total employment creation in absolute n. ibers hcs been greater in rural than in urban areas, but in percentage growth the rural sec- tor, and agriculture in particular, have tended to lag behind the urbani areas. Efficiency of Investment 6.14 The question of the effectiveness of Syria's resource allocation system in achieving macroeconomic (economy-wide) goals for growth and equity is paralleled by the problem of efficiency of resource use on the micro- economic level -- that is, within individual sectors of activity. Just as questions can be raised about the investment criteria which determine the overall direction of investment, there are corresponding questions that arise regarding the allocation mechanisms at the microeconomic level which determine production efficiency, the relative proportions of usage of such factor inputs as capital and labor, and the distribution of income comprised in value added among factors of production. 1/ State intervention in the functional distri- bution of income (i.e. among factors of production) in the public sector ensures at least a minimum degree of equity, in that public sector profits do not accrue to individuals, but it also means that there is no strong internal profit incentive or market mechanism to correct for distortions in factor pricing and resource use. That in the public sector project preparation is at best weak, the profit incentive is virtually absent, cost accounting is poorly practiced and pricing tends not to be geared to efficiency, all afford ample scope for inefficient resource use, wastage, and loss of potenti.al growth. The same observations regarding the public sector also suggest that there would be no strong link between factor pricing (the relative cost of capital and labor) and the choice among techniques that require differing proportions of factor inputs. This surmise is borne out by the fact that increasing capital intensity may be observed in some branches of industry while at the same time other branches have wide margins of overcapacity along with significant degrees of overemployment of labor. 6.15 Systematic evidence of inefficiency in investment or resource use, of course, cannot be found. Even data on incremental capital-output ratios 1/ Gross domestic product (GDP) is the sum of value added in all domestic activities. Value added in a sector of activity comprises two elements of factor income (operating surplus -- profits, and compensation of employees -- wages and salaries); consumption of capital -- depreciation; and, at market prices, net transfers (indirect taxes less subsidies). The composition of value added varies by sector of activity. In manufac- turing, for example, much of value added represents an operating surplus which is not distributed as personal income -- at least not diretctly. The government redistributes a portion of Public Sector profits through the budget to provide certain vital consumer goods at lower prices (equiv- alent to supplementary wages in kind). 160 do not necessarily provide evidence of inefficiency as such. Nevertheless, industrial investment has not yielded quick returns in the form of output growth (see Chapter 9, paragraphs 9.38 ff). This failure of industry to perform as a dynamic engine of growth has been stressed in the section on Employment and Productivity by Sector in Chapter 4 (Population, Employment and Incomes). 6.16 Problems in resource allocation derive not only from the process of investment decisions and the institutional framework for production. They derive also from the means of financing in the economy: from the operation of the banking system and from pricing policy. THE ROLE OF THE BANKS 6.17 Financial intermediation involving a large number of individual in- vestors takes place only for the private sector, which received less than 15 percent of all credit extended by the commercial and specialized banks in 1975. State ownership of the banks in Syria, coupled with the process of centralized investment decisions, means that within the public sector, the role of the banks is basically to finance planned investments and ongoing production. For example, loans and credits for investment expenditure or working capital extended by the Industrial and Agricultural Cooperative Banks tend to be limited fairly strictly to project expenditures foreseen in the plan. For the most part, therefore, neither the availability nor the cost of financing investment is a factor in the decision to invest. The banks do not constitute an independent source of decision-making in the allocation of credit, except for credit to the private sector; their ties to public funds modify their status as independent profit-seeking institutions and, a fortiori, the interest rates they charge neither reflect the market rate for capital nor play any significant role in resource allocation. 1 6.18 Even as intermediaries for plan execution, the banks do not yet perform a well-defined role in resource management. In some cases there is a lack of role definition which is inconsistent with the principle of spe- cialization inherent in Syria's nationalization of the banks and which also interferes with the banks' potential leverage on borrowers. This is true of the Industrial Bank, for example. It provides working capital for all indus- try, but is specifically designated to share the financing of public sector investment with the Public Debt Fund in the Ministry of Finance. Since the division of clients between the Public Debt Fund and the Industrial Bank is apparently arbitrary, and since the cost of the Fund's financing tends to equate in practice to budgetary rather than strict banking terms, the dis- cipline of the Bank's terms tends to be eroded. The recent discussions on establishment of a new and single industrial lending institution reflects acknowledgement of these issues. 6.19 The lack of discipline in lending operations is one important area in which banking practice could be improved to the benefit of more efficient plan implementation, resource saving and enhanced growth. At present, finan- cial planning is weak; and there has been a period of overinvestment and -161 - inflation. The rigidity of controlled producer prices despite rapidly inflat- ing cost has led to deficiencies in cash flow which are financed by the banks. Moreover, pricing and personal incentives in the public sector are relatively weak efficiency levers. As a result of these drawbacks, the banks are often in the posit on of financing inefficiency rather than restraining it. This is compounded by borrowing practice among public sector enterprises, which often includes failure to pay interest or to meet repayment deadlines. Penalty interest rates are applied in theory, but these are usually simply the maximum regulated rates allowable, most lending being at a discount. Moreover, as the Ministry of Finance guarantees all loans to the public sector, there are times when the Ministry will write off unpaid interest owed by the borrower to the banks, all of whose profits are in any case transferred to the Ministry. 6.20 Banks might not be expected to play a major role in resource allo- cation in a centrally planned economy; but even their use as an instrument of government control on investment, practiced in some other socialist coun- tries, seems highly underplayed in Syria. 1/ A closer definition of the role of the banks in the economy, tighter credit discipline and a more fLexible interest rate policy are measures which could be included in a broad program of improved financial planning and management (see Chapter 11, Fiscal and Monetary Policies). In the public sector, however, these could only be made effective by tightening the system of rewards and penalties inherent in the relationship among prices, profits, and earnings in a public production enterprise. PRICING POLICY AND PROCEDURES 6.21 Like the overall system of economic management, the price system in Syria is centrally administered, although not all prices are set directly from the center. Not yet fully centralized, the system in,1977 comprised four distinct categories of prices (for details, see Appendix 6A to this Chapter): (a) prices under direct central control, set and adjusted only by the central authorities, were applied to goods of high social priority, including all goods produced in the public sector. This category included the "vital commodities" subject to a dual price regime (see The Subsidies Issue, this chapter); (b) prices under indirect central control through fixed profit rates applied to most goods not produced in the public sector; (c) prices under decentralized control by provincial authorities applied to a range of goods and some services supplied and sold on a local basis; and (d) free market prices applied to a relatively minor range of goods. Taken as a whole, the system thus comprises a mixture of prices. Some are cost-rigid I/ In some centrally planned economies the banks are-highly integrated into the process of plan elaboration and implementation. In the former role they play an important part both in appraising and in vetting projects as well as ensuring consistency with the financial plan. In plan imple- mentation they are the principal means for control of expenditures by the production enterprises, preventing unplanned and inefficieni: expendi- tures. -162 (unresponsive to cost changes) and are adjusted only by the central institu- tions. Those under the fixed profit regime and the free market are cost- responsive and will reflect cost pressures. This includes the pressure of import costs; the government does not intervene in the conversion of foreign trade prices to domestic prices except in setting the official exchange rate. 6.22 The authorities do attempt to adhere to what may be described as a regime of controlled adjustments of the prices under direct central control, but that adjustments should sometimes fail to reflect shifts in resource scarcities accurately in amount or duration is inevitable -- for the "vital commodities", intentional. Policy for prices under direct central control is therefore accompanied by a system of subsidies, price support and other offsetting payments, the sum of which measures the degree of distortion in- troduced into the system of price control. As such payments exceeded SL 1 billion in 1976 compared to total private consumption of about SL 16 billion (most, but not all, subsidies are on consumer goods), the distortion is of significant proportions. It follows also that relative price relationships may be considerably altered as a consequence of central control. 6.23 The centralized management of the economy has implications for pric- ing beyond the immediate impact of price control in the product market; it has also interrupted the links between the markets for the factors of production and the product markets. A capital market is virtually absent, and state intervention in the banking sector and the relative unimportance of interest rates in investment decisions also detract from strong links between capital costs and final product prices. In the labor market the link between wage cost and product price is equally disrupted by a combination of circumstances, including highly institutionalized hiring and firing practices in both the public and private sectors and a process of wage formation not closely related to productivity gains. The subsidy for vital consumer goods constitutes recognition that the going wage rate understates the real social cost of labor by an amount equivalent to the subsidy. Price Adjustments and Cost Response 6.24 Despite the rigidities imposed on cost-price relationships by the regime of central price control, there is evidence to suggest that the system as a whole does respond -- if somewhat imperfectly -- to the shifting pressure of costs on prices. To this extent it would be wrong to conclude from the discussion of control procedures that the price system gives a grossly dis- torted representation of resource scarcities in all sectors. It should be remembered that rigid price control applies only to a relatively small (though important) range of goods; the policy of controlled adjustments is applied earnestly, though obviously never perfectly; competitive impact on pricing comes from the private sector where pricing is not directly controlled (and where production is generally more efficient) and also from abroad, since import and export prices translate more or less directly into or from domestic prices. Even smuggling to neighboring countries has had an impact on Syrian prices, as in the recent case where the authorities have had to raise the domestic price of carpets to equal that in Jordan. Moreover, the fact that - 163 - there is a market for Syrian currency abroad at close to the official rate has meant that the exchange rate has a validity beyond the limits of the institu- tionalized domestic foreign exchange market. 6.25 Syrian price increases have gained in pace through the mid-1970s in line with inflation trends elsewhere -- evidence that the system does respond to cost changes (see Figure 6.2). Moreover, there is evidence of a positive correlation between cost and price movements in public sector manufacturing, if at times a somewhat imperfect one (see Figure 6.3). Price increases in manufacturing tended to follow the increase in the combined cost of wages and materials in each of the four years-except 1973. The rising cost of materials had a significantly greater impact than unit wage costs. Only in 1975, appar- ently, were wage increases a major cause of inflation in public sector manu- facturing. However, there may be an alternative explanation of this major price increase in 1975, since it far exceeded the increases in material costs and wage costs combined, implying a major increase in profits. The authori- ties may possibly have instituted this major 1975 price revision in response to the dramatic world price increases in raw and intermediate materials for industry in 1974. If true, this would be evidence of how the policy of controlled adjustments can lead to distortions in the relation of prices to costs. For the four years included in Figure 6.3, however, such distortion seems to have been the exception rather than the rule. 6.26 In discussing the role of prices in Syria's allocation of resources, three specific topics demand attention: the relation of prices to planning; the influence of prices on efficiency; and the question of price policy and equity. Prices, Planning, and Resource Allocation 6.27 Prices and planning are not closely coordinated in Syria. In prin- ciple, an important reason for the entire system of price control is to facilitate economic management and planning along orthodox socialist lines. However, the sheer impracticability of extending the administrative structure to achieve this at Syria's present stage of development and in the current environment of price instability makes it difficult to convert principle to practice. To the extent that fixed prices would generally serve to facilitate central planning, therefore, Syria's system is deficient both because not all prices are controlled, and because many prices are adjusted in response to changes in cost. 6.28 In any case, the planning system in Syria had not been suff'iciently well developed by 1976 to allow for the integration of a highly defined role for prices. The practice of striking a "synthetic" balance between :he material requirements of physical investment plans and the financial resources available was first attempted in early 1977 but could not be systematically - 164 - FIGURE 6.2: Evolution of Wholesale and Retail Price Indexes 1962-1976 Index 1962= 100 2S5 200 Wholesale 150 R 1962 1964 1966 1968 1970 1972 1974 1976 Source: Statistical Appendix World Bank -1 8695 FIGURE 6.3: Evolution of Share Weighted Increases In Unit Cost Components in Public Sector Manufacturing 197 1-75-ai Annual Pcrccntage Increase 30 Manufacturing 20 Pricesl1 10 Combined Unit Wage and Material InputCostbd el 0 1971 1972 1973 1974 197i aJ Weights are for the share of each component in total costs. b/ Average earnings deflated by real productivity increases. (/ Wholesale price index for raw materials d/ Implicit deflator for manufacturing (includes private as well as public sector). Source: Statistical Appendix World Bank-18693 - 165 - pursued. 1/ The classic function of prices in planning, to arrive at a "synthetic" monetary valuation of material requirements, is therefore not performed in Syria. Nor is there a need for prices to measure profitability or return on capital investment, as these criteria are not always featured with any degree of importance in project selection and preparation for the public sector industrial plan. The conclusion follows that prices do not serve as major instruments of investment allocation in the public sector. Even in agriculture, where at times price incentives have been used to stimu- late production, practice under Law 14 of 1976 essentially confines the role of prices to equalization of incomes yielded to individual farmers aft:er the fact, from a cropping pattern predetermined by the planning authorities in the Ministry of Agriculture. 27 6.29 In the rest of the private sector, of course, profitability (and hence prices) are essential to investment. In this sector, therefore, alloca- tion mechanisms operate in a fashion similar to that in a free market system, although investment options are highly restricted by investment licensing requirements and by fears of nationalization, which tend to restrict severely the scale of individual investments. This is one reason why the private sector accounts for only about a third of total investment. As mentioned above, the private sector, despite its limited size, is important in providing a base reference point in pricing. -On the one hand it embodies the historical antecedents of the country's price structure, on the other it serves as a competitive factor (at least for some goods) against the public sector. 6.30 Thus although their role in the allocation of public sector invest- ments may be small, prices are not devoid of content in the economy aLnd they remain a datum for producers and consumers in their operations and transac- tions. Prices and Efficiency 6.31 As price setting in the public sector is out of the hands of indi- vidual enterprises, and as enterprises are not operationally independent units, it follows that input and output prices would serve as efficiency levers only if the enterprise were required to show a profit or to minimize its loss. As it is, profit targets are not stipulated and various facilities exist to cus- hion less than optimal performance by an enterprise. These include liberal 1/ For definition of "synthetic" in this context, see the section on Balance of Investment and Savings in this chapter. Upon the reorganization of the State Planning Commission (SPC) in early 1977, a directorate was charged with synthetic planning, but it was understaffed and ccnfined this approach to the requirement for construction materials. 2/ For detailed provisions of Law 14, see Chapter 7, Agriculture and Agri- cultural Planning and Volume 3, Annex 2. - 166 - extension of credit, price support, and payments from the General Organization to offset losses (see Volume 3, Annex 3, The Public Manufacturing Sector). 1/ 6.32 These conditions do not imply that Public Enterprises are necessarily inefficient, but they do mean that it is not necessary for a Public Enterprise to be efficient in order to survive. In the Syrian system, the Public Enter- prise is protected from the ultimate sanction of profit or loss. This is usual in socialist systems, but there are usually other ways in which ef- ficiency is pursued in such systems, including well-defined personal incentives in the form of bonuses and penalties tied to specific targets for production, profit, productivity and reduction of costs. 2/ In Syria such targets and incentives are not well defined and neither workers nor management in the Public Enterprises have strong incentives to seek improved performance. In theory there is a provision for the distribution of 25 percent of net profit to the workers and management in the enterprise, but to date this has not been put into practice. 3/ Neither the external environment nor the conditions internal to the enterprise, therefore, are rigorously geared to pursuit of efficiency. This is evidenced by negative value added (operating deficit rather than surplus) in some enterprises and by generally low labor produc- tivity. Productivity in public sector manufacturing appears to have declined since 1970, implying sharply rising unit wage costs which must have added to existing inflationary pressures (see Table 6.1). 1/ Enterprises are financially independent as accounting units but their operational status is not determined by earning any given level of profits. As described in Appendix 6A to this chapttr, public sector enterprises have their producer prices fixed on the basis of average production costs for all enterprises producing a particular item. This means some enterprises are priced above, others below their average cost of production, a procedure which involves the general organizations in making offset transfers from the surplus- to the deficit-earning enter- prises. Since personal incentives are not strongly fixed to the achieve- ment of a particular project neither the surplus nor the deficit enter- prise has any particular incentive to strive for greater efficiency. 2/ In the most sophisticated Socialist systems these are detailed sets of indicators and norms to which production and efficiency have to conform and to which rewards (and penalties) to labor and management are tied. 3/ See Dr. S.Y. Khalil, Towards a Uniform Cost Accounting System in the Nationalized Cotton Textile Industry in Syria, unpublished Ph.D. Thesis, University of Warsaw. - 167- Table 6.1: EVOLUTION OF UNIT WAGE COST AND PRICES IN PUBLIC MANUFACTURING, SYRIA, 1970-75 (Indexes 1970=100) /a ILb ~~~~Average,c/ Year Price Product ivit Earning- Unit Wage Cost d 1970 100.0 100.0 100.0 100.0 1971 100.0 99.7 102.7 103.0 1972 108.9 84.6 114.2 135.0 1973 129.2 75.9 124.1 1631.5 1974 147.8 90.5 137.8 152.3 1975 180.7 72.8 162.7 223.5 /a Implicit price deflator for value added in manufacturing. The base year is really a three-year average for 1969-71, not 1970. /b Value added per employee at constant 1963 factor cost. 7c Wage bill divided by total number of employees. TJ? Average earnings deflated by real productivity increases. Source: Tables SA2B.5, SA8B.1 and SA8B.2. 6.33 An added administrative problem is that the absence of uniform cost accounting in most enterprises makes efficiency measurement, as well as accu- rate pricing, difficult to achieve. Clearly, this is an aspect of enterprise organization and operation which requires earnest attention. 1/ Prices and Equity 6.34 Syria's policy of price control, and specifically the central control of prices of the "vital" commodities, derives primarily from social rather than economic objectives. Price control of some of the "vital" commodities (sugar, rice and vegetable oil) is coupled with a rationing system which ensures a basic supply of the commodities per head of population at a highly subsidized price (see The Subsidies Issue, this chapter). Price control through fixed profit margins also has equity implications through its impact on the alloca- tion of value added among factor incomes (profits and wages). 6.35 The high degree of direct control which the central authorities exert over prices should in principle provide greater scope than free market 1/ The authorities have acknowledged this problem and a directive was issued in January 1976 to all enterprises to implement uniform cost accounting practice by January 1977. Apparently not many enterprises have done so, partly for reasons of expense, knowhow, lack of adequately trained staff and, according to one official, also because enterprise management resists better accounting practice for fear of exposing inefficiency. - 168 - economies for pursuing specific objectives of growth and equity through pric- ing. The question is, however, whether the authorities have chosen the right balance between growth and equity objectives. Inflationary pressures do have an impact on the structure of relative prices independent of government deci- sions (both by affecting the pattern of controlled adjustments and through automatic adjustments in cost-markup prices), but price control remains a major force in determining relative price relationships. Since 1970, the intersec- toral terms of trade have moved sharply in favor of industry and against both agriculture and services. 1/ If the price index 2/ for industry is taken as 100.0 in 1970, the movement of prices since 1970 in agriculture and services appears as follows: Year Agriculture Services 1970 102.6 96.2 1971 108.6 96.9 1972 115.7 98.7 1973 96.2 86.0 1974 69.2 61.8 1975 64.4 65.9 1976 61.5 65.3 This development draws recent policy into question. Because both agriculture and services provide the sole livelihood of high proportions of the poorest population, equity considerations would argue for a reversal of the trend displayed. Moreover, this would not seem to imply any conflict with growth insofar as higher prices might lead to increases in production at possibly greater rates in agriculture than in industry, where production is likely to be less price-elastic (responsive to price increases). 6.36 The net effect of price policy in the early and mid-1970s was to favor industrial workers over those in other sectors, in other words to favor the public sector over the private sector, which employs most of the workers in agriculture and tertiary activity (trade, transport and services). The general aim of policy was to restrain the increase in consumer prices, but successful achievement of this aim was offset by the resource transfer encour- aged by the shift in terms of trade (relative prices) against agriculture and services. 1/ The intersectoral terms of trade between two sectors are defined as the index of the relative prices of the output of the two sectors. 2/ The price indices for industry, agriculture or setvices, underlying these terms of trade estimates are based on the "implicit price deflators" derived from the national accounts data in constant prices (Table SA2B.5). - 169 - THE SUBSIDIES ISSUE 6.37 In terms of income distribution, the most important group of goods falling under the regime of subsidies are the "vital" consumer goods -- sugar, rice, vegetable oil, and flour for bread. The first three of these are sup- plied to consumers through a two-tier market in which a basic per capita ration is sold at a low, heavily subsidized price, and unlimited quantities are made available at a higher "free" price (actually set by the authorities). 1/ In principle, the policy aims at setting (and adjusting) the "free" price at levels which substantially offset the subsidy provided by the ration price. This is accomplished in practice to different degrees for different commodi- ties. 6.38 An account of the methods and magnitudes involved in the subsidy of these commodities is given in Appendix 6A to this chapter. As shcwn in the Appendix and in Table 6.2, the degree of effective subsidy varies con- siderably among the commodities. In 1976, the ration price of sugar, for example, afforded a substantial gross subsidy of SL 160 million, but it was largely offset by the profit from sales at the free price, giving a net subsidy of only SL 24 million. This is not the case with the other commodi- ties. Also striking is the high rate and absolute value of net subsidy for bread, which accounts for some 85 percent of the total net subsidy. 6.39 It has to be emphasized that the figures in Table 6.2 present indi- cative magnitudes only. The data on which the calculations have been made are in some cases broad estimates and our methodology at times simplistic. A much more thorough analysis of this subject is called for, possibly including a detailed cost and margin analysis of each stage of production and distribu- tion. With a total net subsidy volume of about SL 850 million as against a budget figure for subsidies paid in 1976 of SL 1,065 million it appears that subsidies on the four vital consumer goods have made up about 80 percent of estimated total payments for subsidies and other price support in 1976. The remainder is accounted for by subsidy to other consumer goods and to the "vital" producer goods such as fuels, fertilizer, and cement, as well as by price support payments made on a range of price-controlled products (see Appendix 6A). 6.40 Without more detailed information it is difficult to assess to what extent the system of subsidies for vital consumer goods is attaining its social objectives. Conceptually, the system may be viewed as a redistribution of the factor incomes comprised in value added, in which a part of profits (the operatirng surplus of Public Enterprises) is redirected through the budget into the provision of a portion of wages in kind (the provision of certain consumer goods at low subsidized prices). 6.41 In principle, provision of the subsidies is unobjectionable as a means of attaining certain objectives. In practice, however, questions arise regarding the economic implications of the subsidies, some of which may run 1/ In fact it is the sales that are unrestricted, not the price. - 170- counter to the social objectives being pursued. It could be that instruments other than subsidies would be more efficient socially and economically. Table 6.2: SUBSIDY ON THE FOUR VITAL CONSUMER GOODS, SYRIA, 1976 Element Vegetable of Subsidy Unit of Value Sugar Rice Oil Bread Total Gross Subsidy /a (SL millions) /b 160.0 41.0 73.0 732.0 1,006.0 Net Subsidy /c (SL millions) 24.1 33.2 65.1 732.0 854.0 Net Subsidy (% of Resource Rate /d Cost) 7.5 38.2 59.3 82.2 Implicit Sub- sidy to the Consumer: /e Ration Price (% of Import Price) 65.7 46.7 66.7 Overall (% of Import Price) 37.0 38.7 59.8 73.0 /f /a The gross subsidy is calculated as the difference between estimated resource cost and sales at the subsidized price (sales to the General Organization for consumption in the case of sugar, rice and vegetable oil, sales of flour to bakers in the case of bread). /b In 1976, one Syrian Pound equalled US$0.256. 7T Net subsidy, for two-tier commodities, is the gross subsidy minus the profit of sales at the "free" price. /d The net subsidy rate is the net subsidy as a percentage of resource cost. We The implicit subsidy to the consumer is the ratio of the final consumer price (ration and "free" retail) to the import price (increased by an estimated margin of value added in distribution). /f Calculated on the basis of full resource cost of bread at retail. Source: Based on data supplied by the Ministry of Supply. For details of calculations see Appendix 6A. 6.42 The purpose of the subsidies, coupled with the rationing and reserves systems, is to ensure a minimum availability of the vital commodities for all income groups. The provision of a basic ration at a low subsidized price on a per capita basis will benefit a selected target group only to the extent that the subsidized commodities have a different weight in the consumption pat- tern of different income groups. In this regard the subsidies would tend to be progressive, favoring lower income groups for whom the vital commodities constitute a larger share of total consumption expenditures. Equity Impact 6.43 It is not yet clear, however, whether in practice the subsidy has much redistributive impact. Total sales of some of the vital consumer goods significantly exceed ration sales, indicating that a significant proportion - 171 - of the population is not benefiting from the subsidy. Ministry of Supply estimates can be used to calculate the difference between expected and actual ration sales (the per capita ration multiplied by the total population) in 1976, as a ratio of expected ration sales. This ratio can be interpreted as the implicit percentage of the total population that is not benefiting from the subsidy: Vegetable Sugar Rice Oil 1. Monthly per capita ration (kilograms) 1.5 0.75 0.25 2. Expected Ration Sales (thousand metric tons) 138 69 23 3. Actual Ration sales (thousand metric tons) 134 56 18 4. Actual Total Sales (thousand metric tons) 200 70 24 5. Implicit percent of population not served by the subsidy 1(2-3)/2] 3.0 18.9 21.7 Without more detailed information on the origin of the shortfall of ration sales (at least for rice and oil) and the origins of sales at the "free" price, it is not possible to make an empirical judgment on the net redistri- butive effect of the system. It is possible that the major impact of the subsidy and rationing system is to subsidize consumption in general rather than to benefit specific target groups in the population. Cost Implications 6.44 The system of rationing and subsidy imposes certain costs on the economy both in the form of administrative costs and in the form of foreign exchange costs caused by the need to import certain of the commodities under subsidy. It has not been possible to quantify the administrative cost, as data have been difficult to assemble. Nor is it possible to be precise in estimating the share of import costs due specifically to the subsidy without knowledge of the price elasticity (responsiveness to lower cost) of consumer demand for the commodities concerned. Total imports of the "vital" commodi- ties, however, are substantial and cost more than SL 650 million in foreign exchange in 1976 (about SL 195 million for sugar, SL 70 million for rice, and SL 394 million for wheat and flour). Efficiency Implications 6.45 As described in Appendix 6A to this chapter, the method of providing the subsidies is in some cases not well geared to preventing inefficiency in the production process. The budget support provided to enterprises or general organizations selling commodities at a loss, and the absence of rigorously planned production cost targets permits subsidy payments effectively to finance inefficiency rather than to provide a specific margin of price support to the public. To the extent that this occurs, the costs incurred in the form of resource wastage should be added to the other costs involved. - 172 - Budgetary Implications 6.46 From 1973 to 1976 subsidy payments doubled in cost. As total current budget expenditure tripled in the same period, the share of subsidy payments in total expenditure declined somewhat, to about 18 percent in 1976 (see Chapter 11, Fiscal and Monetary Policies). From the point of view of fiscal burden, this share remains significant. The question arises what degree of subsidy intervention is sustainable in view of other demands on the fiscal resources available for current expenditure. As the level of subsidy payments is highly sensitive to the rate of commodity price inflation, it could be that continued price instability may again raise the share of subsidy costs in total expenditure, thereby constraining other expenditures, principally on defense and education. Macroeconomic Implications 6.47 Because they redistribute value added in a way that tends to sub- sidize consumption in general at the expense of public sector savings and investment, the question arises of whether the subsidies are inflationary. The effective wage rate constituted by cash wages plus the wages in kind provided by the subsidy may be inconsistent with the planned rate of savings. There is no provision built into the system to prevent this, just as there is no internal mechanism to check for consistency between the aggregate level of investment and the resources available (see Balance of Investment and Savings, this chapter). There may thus be an additional social cost resulting from the price instability caused by the shortfall in savings. 6.48 The Syrian authorities are aware of the various implications and there has been some debate on the question of reforming (and even abolishing) the subsidies system. At the center of the issues involved, however, are highly sensitive political implications which constrain the authorities from contemplating dramatic revisions of the system. Thus although defects in the system are acknowledged, any reform would probably have to be gradual and incremental, possibly forming part of a broad program of reform in the system of pricing and resource allocation. INCOME DISTRIBUTION 6.49 Chapters 4 and 5 and earlier sections of this chapter discuss issues relating to equity and income distribution as these have been affected by price policy and price movements, by investment allocation, and by regional development policy. Chapter 5 uses a range of economic indicators to measure economic differentials among provinces. Chapter 4 draws upon surveys of house- hold consumption and expenditure for the year 1961/62 and the year 1971/72 for comparisons of per capita consumption by province. It concludes that the over- all income distribution picture remains obscure: in most provinces there appeared to be real growth in per capita consumption during the 1960s, but in three provinces it declined, and the disparity between per capita consumption in Damascus and in the poorest rural area had widened slightly. In this final section an attempt will be made to summarize the overall impact of policy and - 173 performance on income structure and on trends in income inequality. Regret- tably, the statistical evidence on which to base such an assessment is not strong. The meager evidence available would seem to suggest three major con- clusions concerning income distribution: (a) The degree of disparity in incomes in Syria, while not insignificant, is probably smaller than in other developing countries having a similar per capita income. (b) The tendency in recent years appears to have been for some increase in inequality, or at least for little or no decline in disparities in the 1960s. (c) The major impact of resource allocation policy, including both pricing and investment allocation, on income distribu- tion seems to have been through the comparative neglect of agriculture -- and to some extent of the services sector -- relative to industry. 6.50 These conclusions, however, can be asserted only tenuously as statistical evidence on the structure of income is scant. As the discussion in Chapter 4 has made clear, the latest data on the size distribution of income are from the Household Survey for the year 1961/62 (see Chapter 4, para 4.44). 1/ Detailed data from the Household Survey for the year 1971/72 have yet to be finally tabulated and released. 6.51 To provide at least some basis for arriving at a judgment, an esti- mated gross domestic product (GDP) has been constructed for each province (mohafaza) for total population, population in agriculture, and in the rest of the economy (non-agriculture). This provides a bread ranking of population groups (regional or in rural or urban activities) according to average income level (see Table 6.3). Bearing in mind that these estimates should be used with caution, they suggest a regional structure of income such that about 32 percent of the population (in Damascus City, Damascus Province, and Homs Province) had an average per capita income about 29 percent above the national average and about one-quarter of the population, in the six poorest provinces, had average per capita income about 28 percent below the national average.2/ 1/ In principle a gini ratio or some other concentration coefficient could be calculated on the basis of income tax data, but as tax collections are deficient these would give a misleading picture. 2/ The ranking of provinces is not the same in agriculture and non- agriculture as for total GDP per capita, because of the different shares of population in each sector. Damascus City, for example, has the highest overall GDP per capita but ranks behind several other provinces in non-agricultural GDP per capita. 174 _ Table 6.3: PER CAPITA GDP RANKINGS BY MAJOR SECTOR AND BY MOHAFAZAT IN 1970 GDP per GDP per Capita in Summary Total GDP Capita in Non-Agri- Share of Per Capita GDP Mohafazats Per Capita Agriculture culture Population (Average = 100) (Average per Capita GDP = 100) GROUP A: 31.8 129 Damascus City 143 76 /a 98 Homs 122 241 90 Damascus 117 223 85 GROUP B: 43.5 94 Aleppo 101 67 107 Lattakia 97 86 110 Idleb 85 114 88 Sweida 85 105 83 Hama 84 98 115 GROUP C: 24.7 72 Tartous 82 83 94 Al-Hasakeh 72 51 124 Dar'a 71 83 68 Deir-ez-Zor 69 70 99 Al Raqqa 68 48 52 Quneitra 36 87 19 TOTAL 100 100 100 100.0 100 /a Although there is no rural population in Damascus City, the population census of 1970 shows a figure of 11,690 persons for labor force engaged in agriculture, forestry, hunting and fishing residing in Damascus City (see Central Bureau of Statistics, Statistical Abstract of Syria 1976, Table 4/3, p. 143). Source: Calculations based on 1970 census data for labor force in each sector and on total GDP data. (See Table SAIIA.5.) 6.52 These disparities in per capita GDP appear not to be great compared to some other developing countries, but it is likely that actual income disparities in Syria are greater than the table suggests. First, our method of estimating average income will have tended to understate inequality to some extent. Second, a disparity significantly greater than represented by the aggregate average figures is revealed if the province with lowest per capita GDP is compared to the province with highest per capita GDP, as follows: _ 175- Ratio of Highest to Ratio of Highest to Lowest Province Average of all Provinces Per capita GDP in agriculture 5.04 2.41 Per capita GDP in other activities 6.47 1.24 Total for all activities 4.09 1.43 The basic reason for the greater disparity disclosed above is that agricul- tural productivity levels differ widely among provinces, showing a fivefold spread between the highest and lowest regions. Although the methodology of these calculations biases the figures for agricultural disparities relative to other sectors, the margins involved seem greater than can be explained by the methodology alone. 6.53 An added problem is that the data used are for 1970 and do not reflect changes in the economy since that date. Unfortunately data for sub- sequent years are not available by province, but nationwide GDP estimates by sector of activity show that, despite three good crop years for agriculture (in 1972, 1974, and 1975) during the six-year period 1970-76, the gap between per capita GDP in agriculture and in other activities widened somewhat, from a difference of SL 846 in 1970 to SL 1,090 in 1976, as follows (at World Bank adjusted 1963 factor costs): Gross domestic product per capita 1970 1976 (a) in agriculture (Syrian pounds) 370 446 (b) in other activities (Syrian pounds) 1,216 1,536 (c) Ratio of (a) to (b) (percentage) 30.4 29.0 6.54 Moreover, the comparison is between average figures for both the agriculture and the non-agriculture sector, without distinguishing t:hose sub- sectors and/or regions where per capita value added (productivity) may be substantially different from the average figures. It is therefore possible that if individual regions or sub-sectors are compared, it may be found that the gap between per capita value added accruing to agriculture and that accru- ing to the sectors with highest apparent "productivity" had widened even more. This will certainly have been the case unless those provinces with ithe lowest agricultural productivity levels have in fact increased their productivity more rapidly than the average, which would seem unlikely. 6.55 The principal weakness of the data is that the per capita averages do not show how the per capita product is distributed among individuals. Depending on the distribution of the factor incomes comprised in value added, a widening average differential between agriculture and other sectors could be consistent with either widening or narrowing disparities in personal income, for which detailed data are not available. A breakdown of value added is available for manufacturing in the public sector for 1970-1975 and in the private sector for 1971-1975. The data may be summarized as follows (as per- cent of total value added at current market prices): - 176 - 1970 1971 1972 1973 1974 1975 Value Added in Public Manufacturing (SL m) 531.1 564.4 574.7 642.5 940.6 973.6 Structure: Surplus /a 71.8 71.0 65.1 64.4 71.0 65.2 Wages 28.2 29.0 34.9 35.6 29.0 34.8 Total Value Added 100.0 100.0 100.0 100.0 100.0 100.0 Value Added in Private manufacturing (SL m) n.a. 438.0 589.0 625.0 788.0 632.0 Structure: Surplus /a n.a. 54.6 64.7 63.8 68.3 55.2 Wages n.a. 45.4 35.3 36.2 31.7 44.8 Total Value Added n.a. 100.0 100.0 100.0 100.0 100.0 /a Surplus (profits, interest, rent and depreciation) is calculated residually, as the difference between value added and the wage bill. Source: Tables 4.3, SA8B.1 and SA8B.2. Data on private sector wage bill were supplied by the Central Bureau of Statistics. 6.56 The tendency of the share of public sector wages in value added in manufacturing to rise during this period suggests that industrial workers have benefited more than those in agriculture. Bearing in mind that public sector profits are rechanneled through the budget, such an increase in the share of wages could imply an increase rather than a decline ift overall income in- equality, as the gap between wage income and non-wage incomes may have widened. Such a tendency would be further reinforced were profit earnings in the private sector to have increased relative to wage payment in that sector. The data do not provide a clear picture of trends in this respect since the share of wages in value added has fluctuated quite sharply in recent years. If two-year averages are taken for 1971-72 and 1974-75, however, it appears that the wage share of private industrial value added fell from 40.4 percent in 1971 to 38.3 percent in 1975. 6.57 On balance, therefore, and maintaining a caution regarding the evidence, it would seem that the process of Syria's economic growth in the last half decade has not made for a closing of income differentials and has apparently, in fact, widened them to some degree. Given the steps the country has taken in redistributing land and other assets, and in the control of the distribution of factor incomes, any marginal tendency for an increase in inequality (such as that observed) is unlikely to be the result of structural features in the economy. Rather it has probably resulted from marginal mis- allocation of resources -- for example, the possible relative neglect of agriculture -- and from the uneven impact of inflation on the cost and price structure of the economy. These nonetheless constitute serious distortions, - 177 - but they imply only the need for better economic management, not for more fundamental reforms. RECOMMENDATInNS 6.58 So far as the analysis of this chapter has gone, there are a number of broad policy recommendations which could be made with a view to improving both the price system and the general system of resource management. These recommendations would include at least the following: (a) Definition of the role of prices in the economy. An attempt should be made to define systematically the function of the major categories of prices in the economy and to integrate pricing procedures and policies more closely with the sysl:em of planning. Of necessity this would require making a choice (particularly in agriculture but to some extent also in industry) as to whether the price and profit relationship or the centrally decided physical plan would dominate the process of resource allocation. (b) In the public sector, the. environment of economic management in which prices operate should be tightened to strengthen the role of prices as efficiency levers. This will involve reforms in several areas including planning, financial and banking practice, cost accounting and internal enterprise management. Reforms can only be effective if made in all these areas, not just in some. So long as aggregate financial planning is weak and banking practice slack with regard to default, and so long as rigorous production cost targets in industry are not set while losses are covered by fiscal transfers, prices cannot serve to stimulate management to pursue efficiency. As in socialist countries with more highly developed systems, a set of production and efficiency indicators should be developed in order to oblige the enterprise both to achieve certain physical production goals and to do so within stipulated unit cost: limits. These limits can be progressively reduced over time to induce a secular increase in productive efficiency. In this way the input and output prices facing the enterprise wi:Ll be binding on management. Enterprises should be obliged to work to strict planned profit (or loss) targets, and an improved system of personal incentives should tie remuneration to the achievement of these targets. (c) Greater weight than has been given so far should be given to universalizing the application of uniform cost accounting. Consideration could be given to increasing the degree of obligation contained in the 1976 Directive on this subject, to rescheduling a new and systematically planned implementa- tion timetable and, if necessary, to the seeking of technical assistance to bolster the program. As a side recommendation under this heading, an effort should be made to improve capital depreciation accounting to make some provision to reflect anticipated replacement cost rather than past cost. - 178 - (d) A detailed study of the subsidy system should be undertaken to assess the various costs involved in the provision of both direct and indirect subsidies, to determine the equity impact of the present system and to recommend improvements and/or alterna- tives. Such a study could lay out ways in which modifications to the system could be brought about in politically feasible terms. One way this could be done would be to undertake a graduated phasing out of the general subsidy by restricting sales at the ration price to ever-lower income groups, thus improving the equity impact of the subsidies as well as reinstituting resource cost pricing in this segment of the product market. The study should examine alternatives to the present subsidies, including a cash wage supplement, and it should assess what impact on incomes, consumption, employment and the balance of payments would arise from abolition of the subsidies. (e) To improve present practice, closer attention could be given to the setting of "free" prices of rationed commodities, in order to fully offset the subsidy. This is particularly the case with rice and vegetable oil in which the "free" price has been set at significantly less than resource cost. (f) To minimize the extent to which the provision of subsidies may cushion inefficiency in production of sugar, vegetable oil and flour milling, a means of subsidy payment should be devised which clearly distinguishes between losses which are clearly price related, such as the subsidy coiponent and those which derive from other causes such as wastage and inefficient processing. One way to achieve this would be to oblige the processing enterprises to achieve planned efficiency rates, impose some form of penalty in personal remuneration for shortfalls, and confine the subsidy payment to the price- related deficit only. - 179 - CHAPTER 6 APPENDIX 6A THE PRICE AND SUBSIDIES SYSTEM IN SYRIA 1/ 6A.01 Prices in the Syrian economy are administered under a regime of cen- tral control. This derives partly from purely social motives as in the case of price control of certain essential foodstuffs--and partly also from the politi- cal aspiration to an orthodox socialist system which would be characterized by centrally controlled prices. However, as with the system of general economic management, the price system is not yet fully centralized. There is, at pres- ent, a hierarchy of price categories ranging from those which are centrally and directly fixed to others which are free market prices. While most prices (numerically) fall in the intermediate categories which are subject to varying degrees of indirect control, the prices of the socially most important goods are those subject to the highest degree of central control. THE PRICE SYSTEM 6A.02 The price system can be described in terms of four distinct price categories, namely, (a) prices under direct central control; (b) those under indirect central control; (c) those under decentralized control; and (d) free market prices. In order to describe the range and type of goods falling within each category, the method and institutional responsibility for controL, the frequency of adjustment and the criteria for price setting, a brief account is provided below of each of the four categories. A summary of these charac- teristics is presented as Attachment 1 to this Appendix. Prices Under Central Control 6A.03 Of the prices which are fixed and controlled directly by the central authorities, two principal groups can be distinguished as follows: (a) The "Vital" Commodities. These consist first, of sugar, rice and vegetable oil. For these commodities, there is a basic per capita ration for the population sold against a ration coupon at a fixed and subsidized price. The com- modities can also be bought in unlimited quantities at a higher ("free") price which is also fixed centrally. 2/ 1/ The legal basis for enforcing price policy is laid out in the Decree of the President of the United Arab Republic Enacting Law No. 123 of 1960 on Supplies and Pricing, as amended by Law No. 158 of 1969 on the Law on Supplies and Domestic Trade. 2/ Though referred to in Syria as the "free" price, this is not a free market or market clearing price since it is fixed and adjusted only infrequently by the State. The notion of "free" refers to the un- rationed quantities which can be bought at this price. - 180 _ There is an attempt to fix the "free" price, at least within the bounds of relatively infrequent adjustments, closer to the real commodity cost, than is the ration price. A second subset of the "vital" commodities is comprised of flour (and hence bread), of fertilizer and cement. These commodities are all sold at a subsidized price to consumers and users, though they are not subject to any basic ration. (b) Other Fixed Price Goods. In addition to the "vital" commodi- ties, there is a range of other goods, also deemed politically "important," the prices of which are directly set and controlled by the central authorities. Unlike the "vital" commodities, however, these goods are subject neither to rationing, nor to direct, explicit subsidies. In some cases, however, the price control may confer implicit subsidies, e.g., when price adjust- ments lag behind increases in costs as in the case of domestic public sector manufactures when the fixed price is below produc- tion costs (a case discussed more fully below). The range of prices included in this category can be summarized as follows: (i) The producer's price of all public sector manufactures. (ii) The retail and wholesale prices of all consumer goods deriving from the public sector. (iii) The retail price of consumer good imports via the public sector. 1/ (iv) The farm gate price of the major agricultural commodi- ties. 2/. 6A.04 The principle underlying these designations is that direct control is exerted over those goods deriving from the public sector. Clearly, this is not a watertight rule, since, for example, a high proportion of agricultural produce is privately produced, just as private retailers may sell goods manu- factured in the public sector. The state, however, has a monopoly over the distribution of all the "vital" commodities, as well as over the purchase and subsequent disposal of the major agricultural products. 6A.05 The authority for setting the prices of the "vital" commodities rests with the Economic Committee, which acts in response to submissions made to it by the Ministry of Supply and Home Trade. This procedure applies also to the setting of the major agricultural prices, which are set yearly by the Economic Committee on the advice of both the Ministry of Supply and the Ministry of Agriculture. In the case of the other goods under central con- trol, the Ministry of Supply is in general the authority charged with their administration although in the case of manufactures it acts on the advice of the Ministry of Industry. 1/ There is a catalogue of these prices. 2/ Wheat, cotton, barley, lentils and sugarbeet. - 181=- Prices Under Indirect Central Control 6A.06 Since the system of price control is still in evolution and is not yet fully developed, the authorities have adopted the use of fixed profit mar- gins as an intirmediate measure of control for a large range of goods. These include the wholesale and retail price of most consumer goods, whether deriving from the private or public sector, and to some imports bought and rescld by the private sector, as well as to all private sector manufactures. The prin- ciple of controlled mark-ups is applied essentially on the basis of the type and social priority of goods rather than on their sector of origin. Hlowever, cost mark-up control tends to apply more generally to the private sector, both because the range of goods produced by this sector is of less social priority than those in which the public sector is dominant and because wholesale and retail distribution and trade is still largely handled by the private sector. Profit control, therefore, is a means of regulating potential profiteering by the private sector in the production and final sale of goods to the population. 6A.07 The responsibility for setting and adjusting the rates of mark-up for each type of good rests solely with the Ministry of Supply, although in setting producer prices for private sector manufactures it sets guide:Lines for the Ministry of Industry which in turn fixes the margin. The control is administered by issuing a catalogue-of allowable profit margin over production costs for manufactures, and allowable wholesale and retail percentage mark-ups for final sale. In each case, these margins are maximum limits and producers/ sellers are free to set lower prices if they wish to. Prices Under Decentralized Control 6A.08 For a range of commodities and some services supplied and sold on a local basis, prices are fixed by the Price Control Committee of the local Mohafazat. Examples of goods in this category would include local produce which is seasonal in character such as milk, cheese, some meat, fruits and vegetables, local transport tariffs and prices in local restaurants. Since in some cases (e.g., fruit and vegetables, whose prices are set daily by the Committee), price setting is frequent and based, to some extent, on demand and supply, some prices in this category may often equate to free market prices. Nevertheless, the Committee's intervention is significant. Since also the Ministry of Supply is strongly represented on the Committee, it, too, is able to exert an influence on local prices, bearing in mind inter- regional considerations. Free Market Prices 6A.09 For a relatively small range of goods, there is no price control, and producers or sellers are free to charge their own price. This applies to those goods whose prices are difficult to control, for example, because they have a high craftsmanship component, or are fashion-derived in value. They include a range of luxury goods, furniture, cosmetics, watches, spec- tacles, toys, etc. While possibly large numerically, this category of goods does not comprise a large component of private consumption. - 182'- PRICE SETTING, ADJUSTMENTS AND PRICE SUPPORTS 6A.10 Several criteria govern the level at which the central authorities set prices under their control and the frequency with which they may adjust them. In the case of the "vital" commodities, for example, the objective is unequivocally to benefit the consumer or user by maintaining low and stable prices. For the rationed commodities, for instance, the ration price has been set substantially below the cost price of these commodities and has remained unchanged for over four years. This applies also to flour/bread (which is not rationed) where the price has remained unchanged for five years. 1/ The "free" price of the rationed commodities, however, has been adjusted annually to follow world price trends (the free price of sugar, for example, was SL 1.10/kg in 1973 and was adjusted to SL 1.45/kg in 1974, and to SL 3.00/kg in 1975; that for rice was-SL 0.80/kg in 1973/4 and was increased to SL 1.45/kg in 1975/6). 6A.ll With regard to the other prices under central control, the criteria for setting the price level include production costs, trends in world prices, reasonable profits, expected rates of turnover in the case of some consumer goods, as well as social factors and consideration for the consumer. There is no hard and fast rule regarding the frequency of adjustment of these prices. Some prices remain unadjusted for long periods (the price of shoes, for exam- ple, has been unchanged for over four years) while more frequent adjustments are made in other cases. In general, the consumer goods on the "controlled list" will have their prices assessed for readjustment each year, while in some cases (coffee was a case in 1976) more than one adjustment is made in a year. 6A.12 The policy, therefore, implies a system of "controlled adjustments" which follow cost changes more or less systematically, depending on the frequency of reassessment and on the social policy with respect to the good in question. Inevitably (particularly during periods of rapid inflation), this procedure introduces distortions, albeit in some cases temporary in character, both in the cost-price relationships in production and in the system of relative prices in the product market. To the extent that cost- price distortions lead to marginal losses in production or sale, offset pay- ments are made from a Price Stabilization Fund in the Ministry of Supply. This fund is essentially a discretionary and somewhat minor budget facility internal to the Ministry, used also to support stable domestic prices of imports against rapid changes of foreign prices. The support which the Fund provides in all cases, however, is only for marginal and temporary amounts. Major price support payments such as those made to subsidize the "vital" commodities are made by the Ministry of Finance, as part of the national budget. 6A.13 Clearly, the adjustment of the remaining categories of prices-- those based on fixed margins over costs and the free market prices--will 1/ According to Ministry of Supply officials, bread prices were to be in- creased in April 1977. - 183 - respond more or less automatically to cost and/or demand changes. The price system in total, therefore, consists of a mixture of rigid prices, cost- responsive prices, controlled adjustment prices and those which move freely. THE ADMINISTRATION OF PRICE CONTROL 6A.14 The monitoring of price control is undertaken by the Bureau of Price and Supply Supervision and Control, a division within the Ministry of Supply. The Bureau has offices in all the Mohafazats and a staff team which conducts random checks on pricing practice in both public and private sectors. Price Setting in Industry 6A.15 As described above, there is central price setting in manufacturing industry in both public and private sectors. In principle, the method of con- trol is the same in each sector, namely, that the producer price conforms to a given margin of profit over production costs. In practice, however, pricing is different between the two sectors, with fixed (maximum) margins and non- uniform pricing in the private sector and uniform fixed prices and varying margins in the public sector. This arises because in the private sector, which has to obey the rule of fixed profit margins, production costs of a product may differ between producers whose final price may thus also differ. The fixed margin regime, therefore, is consistent with price competition in this sector. Also, private producers may compete by reducing margins if they wish. 6A.16 In the public sector, however, policy is for prices of a given good to be uniform across all producers. The central authority will fix this price on the basis of the stipulated margin of profit for that good applied to the average cost of production of that good by all the public sector producers. It follows that some producers will earn less than the stipulated profit, others more than this, according to whether their production costs are above or below the average. Some producers may even run at a loss. For all pro- ducers taken collectively, however, the intention is that those earning above the line profits will offset those below the line, and the General Organiza- tion to which the producers belong will execute transfer payments to achieve this in the first instance. In cases where losses are not fully offset by these cross payments, the General Organization has ultimate recourse through the Ministry of Industry to funds from the Ministry of Finance. While public sector enterprises are independent financial accounting units, there is thus an ultimate link with the central budget not only in respect to loss offsets, but also because all net profits are transferrable to the budget. 6A.17 A simple depiction of the composition of industrial prices in each sector, therefore, could be given as follows: - 184 - Private Sector Public Sector Fixed Producer Price (Non-Uniform) Producer Price (Uniform) Fixed Upper (Uniform) (Non-Uniform) Profit Tax Profit Margin Allocations to Budget Individual to Budget I. Profit Production Cost, (including II. Margin depreciation) Average Production Cost (including Depreciation) Public Sector Allocations to the Budget I. Income tax to Ordinary Budget II. Allocation to Public Debt Fund (Net of allocations to share- holders in the case where state ownership is not complete). 6A.18 There are two major technical problems pertaining to industrial price setting. First, cost accounting systems are poorly developed in Syria. Firms tend not to apply unit costing per line of production, but rather aver- age costing based on overall total expenditures which disguises the relative costs of individual items and makes accurate pricing difficult. Moreover, costing procedures are not uniform across all enterprises, which makes calcu- lation of inter-enterprise averages difficult. Second is the problem (clearly not confined to the Syrian economy) that depreciation is based on historic and not replacement costs, which tends to overstate the size of net profits, resulting in cash transfers to the budget, part of which represent depre- ciation. Price Setting in Agriculture 6A.19 Centralized price setting in agriculture, applying as it does to the principal commodities, accounts for about half of all agricultural output. Policy is that the controlled prices of the principal commodities should be uniform across the country (with minor variations for quality) and should be set net of transport costs, which are borne by the state purchasing agencies. Prices are set annually on a pre-planting basis and tend to be aimed at striking a balance between three broad (and often conflicting) criteria, namely: (a) To stimulate production growth and cropping patterns in fulfillment of the plan. (b) To yield an assumed profit rate over costs, with an explicit recent objective of achieving similar profit yields, regardless of crop. - 185 - (c) To balance producer and consumer interests. 6A.20 A major technical problem in relation to agricultural price setting is the lack of detailed farm survey data to facilitate knowledge of average production cotI.s on marginal rather than intra-marginal farms. Tariff Setting of Public Utilities and Services 6A.21 Tariffs for the main public utilities (energy and water) are set and controlled by the Economic Committee and (since its recent formation) by the Services Committee, in conjunction with the relevant Ministry concerned in each case. Freight rates and passenger tariffs for road transport are set by the Ministry of Supply. 6A.22 Tariffs for personal services, most of which are rendered by the private sector, are generally set by the unions and associations of the respective service professions in consultation with state authorities, who establish broad guidelines. Foreign Trade Prices 6A.23 The pricing of goods which enter into foreign trade, whether via the public or private sectors, generally involves no special intervention between foreign price movements and domestic price responses beyond that in any case pertaining to the domestic price regime. The level of traded good prices is found by application of the current exchange rate. In the case of imports, some imports to the private sector carry no price regulation, so the Syrian price of these goods will vary directly with the foreign price. Equally, for those imports sold under fixed mark-up restrictions their domestic price will tend to vary directly with changes in the foreign price. It is only in the case of imports sold at fixed domestic prices that the intervention may be significant. Particularly, this is so with the subsidized "vital" zommodities (some of which are imported) where the domestic price will not follow movements in the foreign currency price.l/ Also, for "non-vital" imports sold at fixed domestic prices, domestic responses will not follow automatically on foreign price changes because these prices have to be reset by the central authori- ties. This rigidity, however, results from the domestic price regime itself (as described above) rather than from any measures specific to the treatment of foreign trade prices, as such. 6A.24 One important class of imports is that of intermediate goods and raw materials imported for public sector industry. Arrangements for pricing I/ As described above, there may be an attempt to adjust the "free" price to reflect broadly the movements in foreign prices, but if this price were averaged with the fixed ration price at which the bulk of the com- modity is sold, the domestic adjustments are highly dampened. these goods are that the Foreign Trade Organization importing the goods will determine the domestic price by applying the exchange rate to the foreign price and adding a small fixed commission or handling margin before passing it on to the local manufacturer. In this way, foreign price changes are felt directly by local users. 6A.25 In the case of exports from the private sector, there is no official regulation as to pricing or profits (though regulations pertain to the deposit of foreign exchange earned with the Central Bank). In the public sector, the Foreign Trade Organizations establish foreign export prices on behalf of local producers who have the final say on whether or not to export at the going price. To the extent that surpluses (or deficits) accrue from export prices being more (or less) favorable than the fixed domestic price at the going exchange rate, the Foreign Trade Organization will retain, or sustain, the difference as a transfer to or from the budget. It is exceptional, however, for enterprises to export at prices less than the production costs plus profit measured in local currency. THE SUBSIDIES SYSTEM: METHOD AND MAGNITUDES 6A.26 The direct subsidies provided for the "vital" commodities are paid at differing rates and in differing ways for each commodity. This section provides notes to describe the method and magnitude of the subsidies provided for sugar, rice and vegetable oil (the "rationed" commodities) and for bread which is unrationed. Sugar 6A.27 Subsidies are provided in the supply of sugar by loss offset payments from the Ministry of Finance. These are made to the General Organization for Sugar (GOFS) which manufactures sugar from local sugarbeet and imported raw sugar, and to TAFCO, the foreign trade organization which imports refined sugar. Both GOFS and TAFCO sell sugar at discounted prices to the General Organization for Consumption (GOC) which monopolizes the wholesale distribu- tion of sugar to retailers. The schematic representation below shows the institutional relationships, the incidence of the subsidy and the onward prices of sugar. The consumer pays SL 0.85/kg for a basic monthly ration of 1.5 kg of sugar per person and can buy any amount at the "free" price of SL 3.00 kg. Assuming the full ration was used, the expected 1976 ration volume would have been 138,000 tons. Total sales in that year were about 200,000 tons. _187 - THE SUBSIDY MECHANISM FOR SUGAR Local sugar beet Imported raw sugar LGDFSC SL 0.81/kg _ MINISTRY _ Loss _v Profit Ration sugar Ration OF s' Offsets Offset GOC SL 0.82/kg RETAILER SL 0.85/kg FINANCE SL 0.81/kg% SL 2.88/kg SL 3.00/k&) "Free" Sugar "Free" I Refined sugar Imports at SL 2.25/kg 6A.28 The rate of subsidy implied by the loss offsets to GOFS and TAFCO depend on the production costs on the one hand and the world market on the other. This subsidy must be offset by the profit made by the GOC (which accrues to the budget) from selling sugar at the free price of SL 2.88/kg against a ration price of SL 0.82/kg. Taking into account the alternative raw material origins, the table below suggests that the notional subsidy on sugar, measured on a gross basis as the difference between the resource cost and the supply price to the GOC at an average level of some 50 percent in 1976 1/. The figures are notional because they are based on broad annual averages and because the tonnage figures are rounded estimates. Also, if it is not possible to distinguish between the raw material origins of ration as against "free" sugar, costing has to be on averages. The figures do, however, provide a reflection of the order of magnitude involved. The net subsidy, as explained, is much less than 50 percent since the GOC earned offsetting profits from the onward sale of "free" sugar which could have been of the order of SL 136 million. On this basis, the net subsidy would have been about SL 24.0 million, i.e., only some 7.5 percent of resource cost (see Table 6A.1). l/ Subsidy Rate = PC - SP = 1.61 - 0.81 = 0.50 PC 1.61 where PC is resource cost (production or import cost). SP is supply price to GOC. This approach to the calculation of the subsidy clearly takes the fact of, and the price structure in domestic sugar production, as data. An alternative approach, based on a social opportunity cost concept, would be to compare domestic retail prices for sugar with the delivered import price of refined sugar. This calculation is the one discussed, in paragraph 6A.29 and shown in the last two lines of Table 6.3. -188 - Table 6A.1: SUGAR SALES, COSTS AND SUBSIDIES IN 1976 Sugar from Production or Sold to GOC ResourSg Gross /c Following Import Cost Quantity Value- Cost- Subsidy - Raw Materials (SL/kg) (000 tons) (SLm) (SLm) Imported Refined 2.25 60 48.6 135.0 86.4 Domestic 1 /d 2.20 30 24.3 66.0 41.7 Domestic 2 Id 1.10 /e 110 89.1 121.0 31.9 Total Sugar 1.6-1 200 162.0 322.0 160.0 of which: Free sugar 66 190.0 /f 54.1 /g 135.9 Profit offset Ration sugar 134 24.1 Net subsidy /a Valued at the supply price of SL 0.81/kg. 74 Quantity sold to GOC valued at production or import cost. /c Resource cost minus value of sales to GOC. 7T Domestic 1 - Sugar from local sugarbeet; Domestic 2 - Sugar from imported raw sugar. /e Calculated on basis of an average world price for raw sugar of US$0.12 per pound and local processing costs of SL 0.04/kg. /f Onward sales by GOC of "free" sugar at SL 2.88/kg. /g "Free" sugar sales valued at the ration sugar price of SL 0.82, denoting the profit accrual from the "free" price of SL 2.88/kg. Source: Data supplied by GOFS, the GOC and Ministry of Supply. 6A.29 Measured against a price of SL 2.25/kg for imported refined sugar, plus an estimated value added of 10 percent in distribution of imported refined sugar for local consumption, which would yield a notional retail price of SL 2.475/kg for imported refined sugar, the implicit subsidy to consumers at the ration price was some 66 percent (1-0.85/2.475). Taking consumption as a whole, however, there appeared to be much less subsidy in- volved when measured in this way, since the weighted average of the "free" and ration prices was SL 1.56/kg at retail. The implicit subsidy to the consumer, on an overall basis (including both ration and "free" sugar), would be 37 percent (1-1.56/2.475). 6A.30 In addition to the subsidies which it might provide forward to the consumer GOFS also provides subsidies backward to the producer, though no systematic attempt is made here to calculate their magnitude. These subsidies are provided through subsidised credit, selling seed to farmers at SL 7.00/kg (against an import price of SL 8.50-9.00) and by providing subsidized fertil- izer through the Agricultural Bank. - 189 - 6A.31 There are three components to the financing of the loss offset pay- ments made to GOFS. First, GOFS has an overdraft facility of up to SI 8 mil- lion (at 7-1/2 percent) with the industrial Bank to support its cash flow. Second, the Ministry of Finance makes periodic advances to GOFS when needed. Finally, at tie end of the financial year the Ministry makes a close off payment for the outstanding loss. While the Ministry apparently keeps a close watch on the operating costs of GOFS, there seems to be no systematic method of distinguishing between losses which are purely price related and those which are efficiency related. The GOFS is not obliged to work to a fixed margin of loss, so some portion of the offset payment may finance inefficiency rather than legitimate subsidy. Rice 6A.32 Rice, all of which is imported, is procured by TAFCO and distributed to the GOC and onward to retailers at both a ration and free price. The sub- sidy element is contained in the price differential between TAFCO's procurement (landed import) price and the price paid by the GOC. Prices onward from the GOC cover handling, storing and a retail margin. As with sugar, the profit earned by GOC forward sales of "free" price rice should be viewed as an offset to the subsidy. The mechanism and magnitudes involved are shown below. THE SUBSIDY MECHANISM FOR RICE Rice Imports SL 1.25/Kg s Ration Rice Ration Rice > l , ~~~~~~~~~~~~SL 0.80/kg v SL 0.69/kg RETAILERS TAF SL 0.66/kg GOC v ^ z~~~o SL 1.25/kg SL 1.45/kg >__ Free Rice Free Rice Loss Offset W r- Ministry Profit of Offset Finance 6A.33 Table 6A.2 lays out the data on which the subsidy volumes and rates have been calculated. The calculations are again notional. because the data on the amounts of free as against rationed rice are GOC estimat:es rather than actual figures. The returned profit from the GOC sale of free rice has been calculated by taking the difference between the "free" and ration prices charged by the GOC to retailers (1.25-0.69). According to this approach, as the table shows, there is a net subsidy involved of-SL 33.2 million or around 38 percent of the import cost of SL 86.9 million (1.25 x 69,489). In the case of rice, a reasonable estimate of the value added in distribution of imported rice may be 20 percent, which would yield a notional retail price of SL 1.50/kg (1.25 x 1.20). On this basis, the implicit subsidy to consumers buying ration rice, calculated as the percentage difference of the ration price to the notional retail price of imported rice is close to 47 percent - 190 - (1-0.80/1.50). On an overall basis since the weighted average of "free" and ration price was SL 0.92/kg, including both ration and "free" sales, the implicit subsidy to the consumer was about 39 percent (1-0.92/1.50). Table 6A.2: SALES, COSTS AND SUBSIDIES FOR RICE IN 1976 Sold to GOC /a /d Quantity Value - Resource Cost/ Gross Subsidy- Net Subsidy/ tons)ThF (Lm) (SLm) (SLM) (SLm)L) Ration Rice 55,600 36.7 69.5 32.8 32.8 Free Rice 13,889 9.2 17.4 8.2 0.4 Total 69,489 45.9 86.9 41.0 33.2 /a Price used was SL 0.66/kg. Th Quantity sold to GOC x import price of SL 1.25/kg. 7F Resource cost minus value of sales. /d Gross subsidy minus profit offset. The latter was calculated at SL 7.8 million being the tonnage of "free" rice sold, valued at the differential between the GOC sale price of ration rice (SL 0.69) and its sale price for "free" rice (SL 1.25), i.e. (1.25-0.69) x 13,889 = SL 7.8 million. Source: Data supplied by GOC and Ministry of Supply. 6A.34 The question of the efficiency impact of the.rice subsidy is appli- cable as it was for sugar, since budget offsets are provided to TAFCO. The value added by TAFCO, however, is negligible. While there may be significant amounts of value added in the operations of the GOC (storage, transportation, etc.) this agency is not subsidized and has to operate within limits set by given in and out prices. The operations of the GOC have been increasingly profitable in recent years. Vegetable Oil 6A.35 In the case of vegetable oil, the subsidy is introduced post produc- tion at the stage of distribution to the GOC. The General Organization for Food (GOFF) pays the producers the price of SL 4.50/kg for produced oil and sells it to the GOC at a discounted price of SL 1.51/kg. The Ministry of Finance reimburses GOFF for the difference. The gearing of prices onward from the GOC covers handling costs and stated margins and passes the implicit sub- sidy onto the consumer, as represented below. - 191 - THE SUBSIDY MECHANISM FOR VEGETABLE OIL Producers SL 4.50/kg Ration Oil Ration Oil SL 1.57/kg SL 1.65/kg GOFF SL 1.51/kg G &OC RETAILERS SL 2.86/k SL 3.00/kg) Loss Offset "Free" Oil "Free" Oil MINISTRY OF Profit FINANCE Offset 6A.36 The subsidy can thus be calculated as shown in Table 6A.3 below, as the difference between the purchase and sale price of GOFF for the total quantity sold, minus the GOC profit offset arising from the difference between its sale price of "free" oil and its ration sale price. This calculation yields a net subsidy rate of about 59 percent of resource cost. Unlike the other commodities, even the "free" price of oil is lower than producltion cost, implying substantial implicit subsidies to consumers. Again, applying the ration price and the weighted overall price (SL 1.99/kg) to the resoarce cost price plus a 10 percent margin for distribution costs (i.e. using a notional retail price of SL 4.95/kg (4.50 x 1.10), there was an implicit subsidy of about 67 percent for ration oil (1-1.65/4.95) and 60 percent overall (1-1.99/4.95). Table 6A.3: SALES, COSTS AND SUBSIDIES FOR VEGETABLE OIL IN 1976 Resource Gross N et Sold to GOC Cost - Subsid-- Subsidy- Quantity Value /a (tons) (SLm) (SLm) (SLm) (SLm) Ration Oil 18,300 27.6 82.4 54.8 54.8 "Free" Oil 6,100 9.2 27.4 18.2 1.0.3 Total 24,400 36.8 109.8 73.0 65.1 /a Sales to GOC at SL 1.51/kg. 7F Sales to GOC valued at SL 4.50/kg. /c Resource cost minus value of sales to GOC at SL 1.51. 7T Gross subsidy minus profit offset. The latter was calculated an the basis of tonnage sold at the "free" price and the difference between the GOC "free" sale price and its ration sale price (2.86-1.57) x 6,100 SL 7.9 million. Source: Data supplied by Ministry of Supply. - 192 - Bread 6A.37 Bread is not a rationed commodity but is sold at subsidized prices. There are three prices for bread, covering three different qualities of flour and types of bread made from them. The subsidy for bread is introduced by the state organizations selling flour at less than cost to the bakers. Since the final retail price of bread is fixed, the bakers are not affected by the sub- sidy and it does not serve as a cushion to inefficiency in their operation. However, as with the case of sugar, subsidy payments may involve some finan- cing of inefficiency in the milling of flour. The mechanism of the subsidy is as follows: THE SUBSIDY MECHANISM FOR BREAD Imported Wheat SL 2.25/kg i Flour: 1. SL 0.20/kg Bread: 1. SL 0.350/kg GFC 2. SL 0.35/kg 2. SL 0.550/kg SL 1.00/kg v 3. SL 0.50/kg 3. SL 0.825/kg Local Wheat / ds t GOC | > Z \ BAKERS (RETAIL) MINISTRY OF FINANCE 6A.38 Calculation of the subsidy amounts is carried out in Table 6A.4 below. Again, the figures are orders of magnitude only since exact data on sales of different qualities of flour were not available. Also, the estimates understate the actual subsidy by the amount of value added involved in con- verting wheat to flour since the subsidies are calculated on the basis of supply prices paid for wheat rather than flour. - 193 - Table 6A.4: SALES, COSTS AND SUBSIDIES FOR FLOUR SOLD TO BAKERS IN 1976 Sales Quantity/ Value/ Resource Cost/ Subsidy - Subsidy Rate/ (000 tons) (SLm) (SLm) _MLm) - (x) Flour 1 520 104 702 598 85.0 Flour 2 100 35 135 100 74.1 Flour 3 40 20 54 34 63.0 Total 660 159 891 732 82.2 /a Ministry of Supply estimates. Tb Using prices paid by bakers for flour of SL 0.20/kg; SL 0.35/kg, and SL 0.50/kg. /c Quantities of flour sold valued at an average wheat price of SL 1.35/Kg. The latter is derived as a weighted average of imported wheat (28 per- cent of total wheat milled), at SL 2.25/kg and local wheat valuied at SL 1.00/kg. This resource cost understates that actually pertaining since it omits the value added by milling. /d Difference between resource cost and actual value of sales to bakers. Ie Subsidy/Resource cost. Source: Data supplied by the Ministry of Supply. 6A.39 From these calculations it is clear that the volume of subsidy involved is considerably greater than that for the other commodities dealt with. The effective subsidy to consumer, however, is less than implied by the 82.2 subsidy rate for flour sales. Using flour sales to bakers as a proxy for bread sales to consumers and applying final prices for bread, 1976 data suggest that consumers spent about SL 270 million on bread in that year. Had bread been priced at its full resource cost, this figure would have been SL 1,002 million (that is, SL 270 million plus the subsidy of SL 732 million). The consumer therefore, pays 27 percent of what he would have paid wlhich is an implicit subsidy of 73 percent. Chapter 6 - 194 Appendix bA Attachment I A SLUMMARY OF THE SYRIAN PRICE SYSTEM Price Categories 1. Prices Under Direct 2. Prices Under 3 Prices Under 4. Free Mtarker Central Control Indirect Central Control Decentralized Control Prices a Method of Control Fixed Prtces -Fixed Margins- Vital Other b Ivpes of Goods Comnidities Goods Manufactures Local Seasonal Luxurv Goods Rationed and Non-RAtioned No Expiicit Consumer Goods Produce Ptgh Craft Goods Subsidized Subsidized Subsidv Local Services Fashion-ble Goods Sugar Flour'3read Selected Con- Rice Fertilizer sumer Goods Vegetable Oil Cement Some Imports Major Agricul- tural Commodities Public Sector Manu- facturers c. Rector Public Sector Public Sector Private Sector Private Sector Private Sector Private 'Cooperative (Agriculture) d. Stage of Production ljholes*le'Retail Produce Price Wholesale Retail Wholesale Retail Distribution Ration Price Wholesale'Retail -Free Price a. Periods of AdWustrent --Infrequent-- Annually Automatic Raily. Wiealy But ad hoc Monthly. Annuslly (longer or shorter) f. Responsible Economic Cosmittee Ministry of Supply Mohafa2at Price Authority --Ministry of Supply and Home Trade-- Ministry of rndustry Comsittee Ministries of (Ministry of Supply) Agriculture and Industry - 195 - CHAPTER 7 AGRICULTURE AND AGRICULTURAL PLANNING 7.01 Agriculture in Syria has been dominated by climate and rainfall since the birth of cereal cultivation in the country before biblical times. The resulting fluctuations in crop production have in turn played an iniportant part in influencing short-term variations in overall economic growth. Chapter 3 (Development Planning & Performance) has described how the effect of rain- fall variations on agricultural production contributed to the satisfact:ory rate of growth in gross domestic product (GDP) in 1953-57 and to the net decline from 1957 to 1960. Accelerated growth during the period of the First Five Year Plan 1961-1965 was also attributed in part to unusually good crops in 1961 through 1965. Conditions were less favorable, however, under the Second Five Year Plan 1966-1970, and during most of the 1960s the rural sector experienced little growth. 7.02 More recently, the growth rate in GDP has been influenced by poor climatic conditions in 1970, 1971, and 1973 and by the three exceptionally good crop years of 1974-1976. In the period 1970-1976 both total GDP and GDP in agriculture showed a strong rate of growth. Syria has achieved a respect- able rate of growth over the last decade. This record is especially remark- able if one considers that this was a turbulent period for Syria due to two wars and the later Lebanese events. The rapid reconstruction of the war damage and the high rate of growth during a period in which the economy was on a war footing is a credit to the tenacity of the Syrian people and the solidarity of the Arab countries, but also to a great extent to two exogenous factors--the unusually good weather of 1974-76 and the steep rise of oil revenues. Since 1973 the quantities of oil produced have doubled, but: the proceeds from oil have grown at least eightfold (see Chapter 9, Indust:rial Organization & Performance). This extraordinary source of revenues has cer- tainly affected the structure of the economy as well as the growth rat:e. Any attempt to analyze the role of agriculture in Syria's economic development must abstract from such chance elements as oil revenues or the weather in order to discover the systematic components of long-term growth (see Chapter 3 and Tables SA 2C.1, SA 2C.2 and SA 2C.3). 7.03 For example, the above-average rainfall of 1974 and 1975 led to overfulfillment of the Third Five Year Plan's 1975 crop targets for wlaeat, fruits and vegetables. Conversely, poor performance in certain other crop categories, notably sugar-beet and lentils, was attributed to the drought of 1973. For plan performance in other agricultural categories, see Approaches to Agricultural Planning, this chapter. This chapter draws upon the work of Mr. Pan A. Yotopoulos (Consultant). - 196 - AGRICULTURE AS A LIMITING FACTOR IN SYRIAN ECONOMIC DEVELOPMENT 7.04 Taking the good years with the bad, agriculture has been a limiting factor in the country's economic growth. There has been general concern among policymakers about the sector's lackluster record. That agriculture is slated to receive new emphasis has been evidenced by the creation of the Supreme Agricultural Council and by statements of the Prime Minister in late 1976 and 1977 (see Future Prospects, this chapter). 7.05 The pronounced variability of agricultural production and the lack of analytical data that would permit adjustment for the influence of the weather, make accurate determination of the relevant growth rates extremely difficult. However, it is clear that during the whole period of the 1960s Syrian agriculture was almost stagnant. Taking three-year moving averages of value added in agriculture at constant 1963 factor cost, the compound rate of growth from 1964 to 1976 was less than 2 percent a year, despite the excellent harvests of the last years of the period (see Figure 7.1 Agricultural Produc- tion 1964-1974 based on Table SA 7.13). 7.06 The rate of population growth, at 3.3 percent a year during 1960-70, exceeded the growth of agricultural production. This trend was amply reflected in declining agricultural exports and in mounting food imports, particularly in poor crop years. The discrepancy between the rate of growth in value added accruing to agriculture and that for the economy as a whole was reflected in the declining share of agriculture in total GDP, as follows: (percent of total GDP at current factor costs) 1955-60 1961-65 1966-70 1971-73 1974-76 Agriculture 31.4 32.1 26.1 23.0 18.6 Mining, manufacturing, utilities and construction 15.6 15.7 17.0 24.7 35.8 Other economic activities 47.0 47.2 56.9 52.3 45.6 Total gross domestic product at factor cost 100.0 100.0 100.0 100.0 100.0 A stagnant agricultural sector, in which productivity has failed to increase, is one factor responsible for the above pattern of sectoral shares. The rapid growth in petroleum production is the other factor. - 197 - FIGURE 7.1 Agriculture Production, Syria, 1964-1974a! (Three--year moving average. Million Syrian pounds)kI Value in Millions of Syrian Pounds 180C 1700 - 1600 - soa Total Agriculture C 1500 __ 1400 1300 _- 1200 - . M OerC s Total Cropsk 900 _ 80C - 600 - - - ...........- ...."7 Sourcc~ota Tietc ris eeableS 71 .L... z__=..n,^g.---...................... 300 s_ l ^ _ / / ~~~~~~~~~Millc Other Crops MetOther Livestock _ 10C _ _i_ - _ i _ ~~~~~~Eggs- 1964 1965 1966 1967 1968 1969 1970 1971 19 72 19 73 197i4 a/ ValLuc added in aIgriculture at constanit 1963 ilactoir cost. b/ At constant 1963 t'actor cost World Bank -18817 Sourcc: TabJe SA 7 . 13 - 198 - 7.07 The relative decline in the size and importance of the agricultural sector is a well-established characteristic of the early stages of transforma- tion in a developing economy. This usually does not indicate that agriculture has not grown; it merely means that other sectors have grown more rapidly, and that agricultural growth has been fitted into new patterns of demand where it supplies more materials to domestic industry and into shifting allocation of the factors of production in which capital investment in agriculture increases productivity and labor is diverted into the more rapidly growing sectors of activity. 7.08 A comparison of the role of agriculture in the growth of the Syrian economy during 1960-75, with international experience during 1950-1970, shows that while agriculture's share in employment was not significantly different from international averages, its contribution to GDP was signifi- cantly lower: 1/ Percentage Share of Agriculture in: GDP Employment International International Syria Average Syria Average 1970 23 33 50 53 1975 18 30 51 48 7.09 An objective of both intermediate and long-term policy should be to make economic growth more broadly based and diffused through a number of activities instead of concentrating on petroleum production, which absorbs a high ratio of capital to labor. The first step in this direction would be to stimulate growth in the agricultural sector to increase its share in GDP. This would call for a rate of growth in agriculture exceeding the growth rate in total GDP. On the basis of projected rates of GDP growth from 1976 through 1980, of some 6-8 percent per year, an annual rate of growth in agricultural GDP of only 3 percent would further reduce its share in total GDP to 17 percent by 1980. An annual growth rate of 6 percent in agriculture would increase its share slightly to 19.4 percent; to bring its share up to 22.5 percent in 1980 would require 10 percent annual growth in agriculture compared to 7.6 percent for total GDP. 7.10 That agriculture has failed in the past to provide sufficient impetus to Syria's economic growth is further evidenced by the trend in merchandise trade, as follows: 1/ Hollis B. Chenery and M. Syrquin, Patterns of Development, 1950-1970 (London and New York: Oxford University Press, 1975); see also P.A. Yotopoulos and J.B. Nugent, Economics of Development: Empirical Investiga- tions (New York: Harper and Row, 1976) pp. 286 ff. - 199 - 1963 1971 1975 Exports Total (Millions of Syrian 720.9 788.9 3,440.9 Agricultural pounds in current prices) 661.3 519.6 712.4 Agricultural (As percent of total exports) 91.7 65.8 20.7 Imports Total (Millions of Syrian 897.5 1,703.5 6,172.7 Agricultural pounds in current prices) 176.3 563.5 633.9 Agricultural (As percent of total imports) 19.6 33.] 17.3 In future economic development, the contribution of agriculture can be enhanced both by expanding exports and by replacing imports by domestic production. Agriculture is a strategic sector in Syria, and it must receive speciial atten- tion, lest it act as a potent brake on the process of economic development. MAIN FEATURES OF LAND USE AND OWNERSHIP 7.11 Most land is cultivated by private farmers, but production units also include state farms and cooperatives (for details, see Volume 3, Annex 2). The state farm sector has remained relatively small, occupying less than 2 percent of land under cultivation in 1975. About 16 percent of the land was farmed by cooperatives. The majority are multipurpose service cooperatives formed to act as intermediaries between farmers and the agricultural institu- tions. The participating farmers retain ownership of their land. Only about 15 percent of the cooperatives own and farm the land jointly. This jointly- owned land was distributed under the land reform or when irrigation projects were initiated. In 1975 about 15 percent of all cropland was under irrigation, but only 12 percent of rainfed cropland, was farmed by cooperatives. More than 80 percent of the land under cultivation was in private farms. These are found in all areas, but are most predominant on rainfed cropland. 7.12 In 1975 about 25 percent of the land expropriated under the land reform program initiated in 1958 remained undistributed, but the government considered that the redistribution already accomplished (largely aft:er 1968) had achieved equity (for details, see Volume 3, Annex 2). The Agrarian Reform Law (No. 161 of 1958) and subsequent Legislative Decrees accomplisheid a significant change in the size distribution of landholdings (see Table 7.1). 1/ 1/ For references see Ministry of Information, Documents Relating to Socialist Conversion in the Syrian Arab Republic, Damascus, 1966. - 200 - Table 7.1: SIZE DISTRIBUTION OF LANDHOLDINGS BEFORE AND AFTER LAND REFORM REDISTRIBUTION, SYRIA, 1958 AND 1971 /a Before Reform After Reform Size of Farm 1958 1971 (Hectares)- ----(Percent of all farms)---- Less than 2 1 15 2- 5 5 28 5- 7 7 9 7- 25 17 42 25- 50 11 5 50 - 100 10 1 100 - 500 24 - 500 - 1,000 9 1,000+ 16 /a See also Table 4.9 in Chapter 4 of this volume, where some- what different data appear. /b One hectare is equivalent to 2.71045 acres. Source: Unpublished data provided by the Government. 7.13 Of the country's estimated 8.0 million hectares (19.9 million acres) of arable land--less than half the total land area--only 516,000 hectares (1.3 million acres) were under irrigation in 1975. Of the remaining 7.5 million hectares (18.5 million acres) thought to be arable, 27 percent was marginal cropland cultivable only under good rainfall conditions (see Table SA 7.2). Only 40 percent was actually under crop during the year; 33 percent had to be left fallow to regenerate the depleted soil. Most of the rainfed cropland receives minimal mean annual rainfall (see map at front of this volume). Even in stability zones I and II, where mean annual rainfall exceeds 250 millimeters (10 inches), the uneven seasonal distribution of the rains and their variability create pronounced fluctuations in agricultural production (see Chapter 8 and Volume 3, Annex 2). - 201 - Table 7.2: LAND USE, 1972-1976 Item 1972 1973 1974 1975 1976 Irrigated cultivation 625 619 578 516 547 Rainfed cultivation 2,479 22778 1,956 3,184 3,702 Subtotal, land under crop 3,104 3,397 3,534 3,700 4,249 Land under fallow 2,899 2,481 2,493 1,776 1295 Subtotal, land under cultivation 6,003 5,878 6,027 5,476 5,544 Cultivable but unused 2,503 2,067 2,025 479 /a 338 /a Subtotal, arable land 7,506 7,945 8,052 5,955 51,882 Grazing land 6,065 6,497 6,393 8,631 8,549 Forest 518 481 446 445 457 Other uncultivable land 3,431 3,595 3,627 3,487 3,630 Subtotal, uncultivable land 10,014 10,573 10,466 12,563 12,636 /a Most of the land previously included in this category is considered now as steppe and pastures (grazing land). Source: Central Bureau of Statistics. COMPONENTS OF PRODUCTION, 1964-74 7.14 The main impact of the variability in agricultural output is notice- able for cereal crops (principally wheat and barley) produced on rainfed lands and for livestock products and livestock grazed in the semiarid regions (see Chapter 8). Longer-term changes in the composition of Syrian agricultural production over the decade between 1964 and 1974 are shown in the percentage figures of Table SA 7.13. During this period crop production grew by 2.2 per- cent a year, gaining in importance relative to livestock production, which remained stagnant. Its share went from less than 70 percent in 1965-1970 to about 75 percent in 1974. Within the crop sector, growth in cereal production has kept pace with overall agricultural growth. Cereals accounted for just under 20 percent of total output in 1974. Production of industrial crops - 202 - principally cotton, showed no growth and therefore declined in importance from about 25 percent of total output to 20 percent. Fruits and vegetables, the third major component of the crop subsector, experienced the greatest growth from less than 20 percent to almost 30 percent of total output. The livestock sector did not experience growth and its contribution declined from 30 percent of total output in 1964 to 25 percent in 1974. Milk and meat are the two principal livestock products and each accounted for about 10 percent of total output in 1974. Poultry and poultry production showed considerable growth. It is worth noting at this point that the commodities which showed the most rapid rate of growth were in general the ones not subject to official price controls--in particular potatoes, tomatoes, citrus, poultry, and eggs. 7.15 The relatively low rate of growth in agricultural output from 1964 through 1975 was amply reflected in declining agricultural exports and in- creasing imports (see para 7.10). For example, wheat, once a major export earner for Syria, was exported in sizeable quantities only in an occasional good crop year such as 1q72. Similarly, livestock products, another tradi- tional export, show negative trade balances in some years. Even commodities with good growth performance, such as fruits and vegetables, are still unable to meet increased demand. This means valuable foreign exchange must be increasingly allocated to food imports. APPROACHES TO AGRICULTURAL PLANNING 7.16 In mid-1977 the period of the Fourth Five Year Plan 1976-1980, al- ready one-third over, was overcast by the legacy of the Third Plan and of the abnormal period for Syria which it covered. The Third Five Year Plan for agriculture suffered from the common ailments of Syrian national planning. Although couched in terms of the usual sectoral and subsectoral aggregates, growth targets and performance criteria, it was characterized by the absence of any link between the investments proposed and the growth targets to be achieved and it suffered from lack of correlation among proposed investments (see Chapter 3). The immediate reason for this failing is that the Third Plan for agriculture consisted of a collection of projects based largely on intel- ligent judgements but lacking the benefit of any underlying economic feas- ibility studies and of the necessary agronomic, technological and climatic data. Consequently, it failed to provide a feasible and consistent program of interrelated projects that complemented one another and it largely over- looked the policy instruments that were needed for Plan implementation. This background is relevant to subsequent concerns in that the Third Plan did not supply the necessary information basis and experience for the formulation of the Fourth Plan. 7.17 The outcome of the Third Plan was affected not only by its poor con- ceptualization but by the occurrence of such exogenous factors as the 1973 war, the 1973 drought and subsequent good crop years, and the Lebanese events of 1973. The good rains of 1974-76 meant that wheat production reached 125 percent of target in 1975 (see Table 7.3) and achieved arother 10 percent - 203 - Table 7.3: QUANTITATIVE AGRICULTURAL PRODUCTION TARGETS OF THE THIRD AND FOURTH FIVE-YEAR PLANS, SYRIA, 1975 and 1980 (Thousand metric tons) /a ------------- Third Plan -------------- ---- Fourth Plan ---- Targeted 1969-71 Base Targeted Base Fercent Average Year Percent 1975 1975 Year Increase 1980 Commodity Actual 1970 Increase Target Actual 1975 1976-80 Target Milk 472 557 23 685 567 794 21] 960 Meat - 79 32 104 - 93 10C 194 Honey 0.25 0.23 30 0.30 0.28 Silk 0.36 0.28 43 0.40 0.28 Dry Legumes Dry Fodder Green Fodder Cereals Wheat 824 820 51 1,241 1,550 1,600 44 2,300 Barley 374 600 17 700 596 Lentils 80 73 66 121 67/b Sugarbeet 216 260 58 410 187 198 960 2,100 Cotton 391 400 28 512 414 392 :3 404 Tobacco 8 8 25 10 12 Groundnuts 18 16 38 (peanuts) 22 21 Tomatoes 210 216 53 330 375 363 31 475 Potatoes 62 50 40 70 125 144 174 395 Onion 68 50 130 135 133 117 62 189 Fruit 675 68 1,133 Apples 25 23 100 46 57 Citrus Fruit 11 11 157 18 28 Eggs (millions) 310 240 67 400 656 Annual Rate of Growth of 5.1 6.2 8.0 Agriculture (percent) /a One metric ton is equivalent to 1.1023 short ton or 0.984 long ton. /b Lentil production doubled in 1976 in response to an increase in the farmgate price. Sources: Adapted from Central Bureau of Statistics, Statistical Abstract of Syria 1976, and Ministry of Agriculture and Agrarian Reform. - 204 - increase in 1976, to total output of 1.7 million metric tons. 1/ Production in 1975 was 118 percent of target for vegetables and 132 percent of target for fruits. Production fell short of 1975 targets in several other crop and livestock categories. Only 45 percent of projected development expenditure on agriculture was actually disbursed under the Third Plan. It was left to the Fourth Five Year Plan to do the necessary catching up. Agricultural Planning in the Fourth Five Year Plan 1976-1980 7.18 The preparation of the Fourth Plan for agriculture came as a reac- tion to the disappointing performance of the sector through 1973 and sought the answer to agricultural stagnation in an attempt at comprehensive and holistic planning. The new approach was devised in a reputedly voluminous document prepared by the Arab League in Khartoum, and is detailed in Syria's Annual Agricultural Production Plan, an elaboration of the section of the Fourth Plan dealing with agriculture. 2/ The discussion that follows is concerned with the targets and planning approaches set forth in this docu- ment. The targets, however, are no longer considered binding, and planning approaches are also destined for eventual revision. In November 1976 the decision was made on the highest level to proceed only with ongoing projects for which investment was already committed, and in 1977 a new Plan document was being prepared (see Future Prospects, below). 7.19 In the initial Fourth Plan document, the targeted annual rate of growth in agriculture during the Plan period is 8 percent, against 5.1 percent in the Third Plan. The 1980 targets for some representative commodities and their projected growth for the five-year period appear in Table 7.2. Of the total planned public investment for 1976-80 SL 10.4 billion or 23.3 percent is to be for agriculture, as compared to 34 percent in the Third Plan. If one excludes the Euphrates portion of the investment, agriculture is to command 6.7 percent of total investment expenditure, as compared to 10.1 percent in the Third Plan. The rest of the resources that the Fourth Plan expects to be devoted to agriculture (such as technical personnel, mechanical equipment, and chemical and biological inputs) are roughly equivalent to those projected under the Third Plan (see Volume 3, Annex 2). Yet the targets of the Fourth Plan are much more ambitious than those of the Third Plan for two basic reasons: first, because significant additions of new irrigated lands are planned; and second, because an attempt is made at rationalizing the use of existing resources by eliminating inefficiencies and achieving full capacity utilization of inputs, especially of land and capital. The analysis of these two aspects would thus be necessary and also sufficient to judge the feasi- bility of the Fourth Plan, especially since it comes on the heels of the expe- rience with the Third Plan. 1/ One metric ton is equivalent to 1.1023 short ton or 0.984 long ton. 2/ Ministry of Agriculture and Agrarian Reform, Annual Agricultural Production Plan of Syria for 1976/1977 (in Arabic). 205 7.20 With regard to irrigation, the assumption of the Fourth Plan is that 240,000 hectares of new irrigated lands will be added in the Euphrates Basin, of which 135,000 hectares are to be under cultivation by 1980. 1/ An addi- tional 53,000 hectares will be coming from other irrigation projects. As a result, a net addition of 188,000 hectares of irrigated land is expected by 1980. This expectation is unrealistic (see Policy Instruments, below, and Chapter 8). 7.21 The legal framework for rationalizing agricultural production was set by Law Number 14 of November 9, 1975. The purpose of the law is to dictate and enforce land use, cropping schemes and cultivation practices "consistent with the best agricultural techniques available," so that speci- fied annual production targets are met. The implementation of the law is based on the detailed Annual Agricultural Production Plan prepared by the Ministry of Agriculture, and rests on the Ministry's responsibility for licensing each farmer and certifying his proposed land use as consistent with the Annual Plan. 2/ The policy instruments for the enforcement of this law include a set of -ncentives and penalties. The penalties for noncompliance with the law include possible jail sentences and fines, loss of crops produced in violation of the Plan and confiscation of the land for an unspecified time, during which the government would operate it and keep the generated revenues. The incentives provided by the law include the preplanting determinat:ion of product prices, the determination of input prices, and access to credit for such inputs as seed, fertilizer and pesticides for the licensed farmers who have been certified as complying with the Annual Plan. The inputs will mostly be supplied in kind, to be repaid out of the harvest. The ro'Le of the Agricultural Credit Bank in providing credit and inputs becomes crucial under the new law. 7.22 The Annual Agricultural Production Plan for crop year 1976/77 was prepared by the Ministry of Agriculture in conjunction with Law Number 14. It is a detailed document that builds an imposing scaffolding of material balances (balancing available material resources against Plan requirements) as superstructure on an underpinning of relatively scant factual information. The basic data for the Annual Plan are broken down by province (mohafaza), and include cultivable land classified by type as irrigated, unirrigated and idle in five stability zones based on mean annual rainfall (see Table 7.4). Information is also provided for each province on existing land use and on the theoretical yields to be obtained on the basis of recent experience. Once the nationwide targets of the Plan have been reduced to their annual components, production quotas are assigned to each province by land type 1/ One hectare is equivalent to 2.47 acres. 2/ Licensing is not required for farmers having less than 2 hectares or those on rainfed land where mean annual rainfall is less than 250 milli- meters (10 inches). - 206 - and stability zone, according to a detailed crop rotation and intensification scheme devised for each province. 1/ An interesting feature--and one which is no mean task in itself considering that the Annual Plan was prepared without the help of computer facilities--is that after all these detailed production quotas are summed up, they are in harmony with the targets of the Fourth Plan, given two assumptions: (i) that an overall cropping index 2/ of 160 is Table 7.4: SYRIAN ARAB REPUBLIC: DISTRIBUTION OF CULTIVABLE LANDS ACCORDING TO STABILITY ZONES /a Irrigated Non-Irrigated Idle Total Hectares % Hectares % Hectares % Hectares % Stability Zone I 147,699 27.3 1,358,873 27.5 280,394 59.5 1,786,966 30.0 Percent 8.3 76.0 15.7 100 Stability Zone II 105,766 19.6 1,837,810 37.2 54,307 11.5 1,997,883 33 Percent 5.3 92.0 2.7 100 Stability Zones III-IV 286,873 53.1 1,748,091 35.3 136,565 29.0 2,181,529 36 Percent 13.1 80.1 6.8 100 TOTAL 540,338 100 4,944,774 100 472,266 100 5,966,378 100 Percent 9.1 82.9 8.0 100 /a See Chapter 8, Table 8.1. Source: Syrian Arab Republic, Ministry of Agriculture and Agrarian Reform, Annual Agricultural Production Plan of Syria for 1976-1977 (in Arabic). 1/ The detail in which the crop rotation and intensification schemes are laid out often staggers the mind. For example, for the 8,190 hectares of artesian-well-irrigated land of Hama Province the following scheme is prescribed: Mexican wheat 45 percent; vetch 5 percent; fall sugar- beet 20 percent; spring potatoes 3 percent; fall potatoes 1.5 percent; broad beans 3.0 percent; cotton 40 percent; corn 10 percent; onions 2 percent; vegetables 10 percent; string beans 8 percent; soybeans 3 per- cent; and summer vegetables 4 percent. The total cropping index for this category of land for Hama is 136.5 percent. For the unirrigated land category of Stability Zone I of Sweida Province, which amounts to 6,300 hectares, the following scheme is prescribed: local wheat 50 percent; barley 10 percent; chickpeas 15 percent; lentils 5 percent; fodder 7 percent; and vegetables 13 percent. The total cropping index for this category of land in Sweida is 100. 2/ This is land actually under crop as a percentage of land under cultiva- tion (including fallow). - 207 - achieved for irrigated lands, 100 for Stability Zone I and 70 for Stability Zone II; (ii) that significant increases in yields are achieved, up to 30 tons per hectare in sugarbeet (instead of the current yield of 23 tons) anad 2.5 tons per hectare instead of 2.0 in cotton. 7.23 The arithmetic of the Annual Plan is consistent with the numbers of the Fourth Plan. The important question that arises is whether the Plan itself is also consistent, and especially whether it is feasible. The Policy Instruments and the Feasibility of the Agricultural Plan 7.24 Whether the Fourth Plan's targets for agriculture have been set realistically can be readily checked by examining the crucial assumptions we listed above on the expansion of irrigated lands, on cropping intensity and on increase in yields. The consistency of the Plan and its feasibility in general depend upon the relationship between targets and policy instruments. 7.25 Irrigation and reclamation will be discussed in more detail in the next chapter of this report. Here we will refer specifically to the prospects of irrigation in the Euphrates Basin. When development of the Basirn is com- pleted, it is to cover 618,000 hectares of irigated lands. Of these!, about 167,000 hectares were already irrigated before the construction of the dam. Development of these lands would mainly imply rehabilitation (including flood control and control of waterlogging and salinity) which could greatly enhance their productivity. Development of the rest of the acreage would imply both reclamation of the desert and controlled irrigation. 7.26 The current situation and the prospects for irrigation in the Euphrates Basin by 1980 can be summarized by the following projects: (1) The pilot project in Balikh to irrigate 20,000 hectares. By 1975 to 1976 there were 16,080 hectares under irrigation or under crop, and by 1980 the remaining 4,000 hectares are expected to be developed. However, severe gypsum problems have arisen with the local collapse of canals, which may make necessary the withdrawal of some lands. (2) The Model State Farm in Maskaneh with 2,000 hectares under irrigation. Another 2,000 hectares will be added by 1980. In addition 17,000 hectares are expected to be developed by 1980 for other state farms. (3) A Romanian project of ROMAGRIMEX in the Middle Euphrates involving irrigation of 27,000 hectares to be finished by 1980. (4) In the Balikh Basin Section I financing has been obtained for 10,000 hectares which could be under irrigation by 1979. - 208 - (5) Studies have been completed for two other areas: 30,000 hectares in the Lower Euphrates Valley (French study) and 15,000 hectares in East Maskaneh (Japanese study). Financing for these projects has not yet been committed and, even if it were, they would not be finished by 1980. 7.27 The conclusion is that under the most propitious circumstances the maximum new irrigated area expected by 1980 in the Euphrates Basin would not exceed 60,000 hectares. A more realistic estimate would be 40,000 hectares. The figure in the Plan of 135,000 new irrigated hectares is, of course, unreal- istic and the figure of 53,000 hectares for irrigation projects in the rest of the country is also questionable. These reservations are by now widely shared in Syria and it is becoming evident that the undiscriminating development of the whole Euphrates Basin, as initially planned, may not be an economic propo- sition--not even technologically feasible--in the short run. In any event, nb more than 20,000 hectares of new lands a year can be developed under the best of circumstances. 7.28 The cropping intensity prescribed in the Plan varies for irrigated and rainfed land and by stability zone. An overall cropping index of 160 for irrigated lands will be difficult to achieve since it differs significantly from current practice. The 167,000 hectares of previously irrigated lands in the Euphrates Basin, for example, still grow only one crop a year, roughly consisting of 50 percent cotton and 50 percent wheat-barley rotation. The major problems that restrict more general double-cropping are soil salinity and lack of labor. The rainfed areas of Stability Zones I and II are also planned to achieve an overall cropping index of 100 and 70, respectively. Yet of the 3,529,000 hectares of rainfed land under cultivation in the two zones, only 1,958,000 hectares were cropped in 1975, achieving a combined cropping index of 55 (1,958 as a percentage of 3,529). 7.29 The overstatement of the prospects for yield increases in the Plan can be demonstrated with the example of cotton, one of the most dynamic crops of Syrian agriculture. Unstinting local research made substantial increases in cotton yields possible: from 1.3 tons per hectare in 1962, to 1.6 in 1971 and to 2.0 in 1975, with the best-quality land yielding as much as 2,350 kilo- grams of seed cotton per hectare (2,097 pounds an acre) in 1975. This places Syria among the six countries having the world's highest cotton yields. 7.30 The dramatic increase in yields by 58 percent in just over a decade, and especially the 25 percent increase since 1971, was due to the progressive switch from varieties of Carolina Queen to Aleppo I varieties. As a result, the area under cotton has decreased by about 33 percent from the 1962-63 high of 300,000 hectares with no decrease in total production. Cotton yield increases at such a rate cannot of course be expected to continue in the future. First, by 1973-74, 97 percent of the cotton area was already planted with Aleppo I varieties. Further yield increases will have to come from the Aleppo 40 varieties which will at best result in a marginal improvement in yields of no more than 7 percent. Second, to the extent that the marginal -209 - lands have already been withdrawn from cultivation, the contribution of irrigation or fertilization to increased cotton yields will be more mDdest in the future. As a result, the Cotton Bureau estimates that at a maKimum the average yield by 1980 will be 2,300 kilograms per hectare with the best- irrigated lands yielding as much as 2,500 kilograms. The target of the Plan for cotton yields is, therefore, unrealistic. 7.31 The problem of labor shortages has been mentioned above and employ- ment in general is the subject of Chapter 4. Here it suffices to mention that the problem of availability of labor and labor requirements for agricultural production is entirely overlooked in the Plan, and has been traditionally neglected in Syria. Various labor force statistics are available, and reported elsewhere, but agricultural employment and labor balances have never been estimated, nor has labor utilization been assessed by farm management studies. This area represents one of the weakest points that might make planning for Syrian agriculture entirely futile. The need for new research and data in this area is especially pressing since there is growing evidence, reflected in public statements and policy measures, that the agricultural sector is plagued by bottlenecks and even chronic labor shortages that reach crisis proportions. There is evidence that development of the newly-irrigated lands has been ham- pered by the reluctance of farmers to leave their present villages for the low wages paid to hired labor on state farms (SL 6 to 12 a day). Even where new lands have been distributed to private farmers, impressionistic evidence and casual empiricism suggest that the social motivation and incentives requisite to build successful agriculture have not been provided. Many newly- settled farmers, therefore, soon become absentee landlords. 7.32 The approach to retaining labor on the farms must be built around increasing agricultural productivity and improving the quality of life. The village, especially the new villages established on lands where nothing existed before, must become organized social units, as distinct from a collection of bare and minimal housing facilities. This takes time and education, but must be started immediately by bringing, as a minimum, the public facilities, the roads, the lights (literally) and the trees to the countryside. The government has recently introduced administrative restrictions to stem the rural exodus. There is an attempt to channel the hiring of nonagricultural employees through the employment offices set up by the Ministry of Labor and Social Affairs in each province. This is coupled with the requirement that a worker must have lived in a particular province for a period of five years before he can register at the employment office. Such administrative devices can only be considered as short-run, stop-gap measures and are bound to fail unless posi- tive reinforcement is provided for staying in the rural areas and wcrking in agriculture. 7.33 The relationship between the targets of the plan and the instruments available to the planners for its implementation revolves around Law 14 of 1975 and the crop rotation scheme. Licensing control of the farmers of irrigated land and of land in Stability Zone I, where mean annual rainfall exceeds 250 millimeters (10 inches), is the major means for enforcing compliance with the crop rotation scheme. Two problems arise in connection with such licensing. First, the cost of enforcement is prohibitive. Second, full compliance with - 210 - the rotation scheme of the respective provinces would result in fragmenting farmers' fields into small parcels where a large number of unrelated crops are cultivated. The resulting physical diseconomies of scale constitute a strong incentive for the farmers, especially the small ones, to avoid licensing in order to evade these consequences of the scheme. Presumably in recognition of these constraints, farmers with less than 2 hectares are exempted from the licensing requirements. This exception applies to a large number of farmers since 26.8 percent of all holdings are under 2 hectares (averaging less than 1 hectare each), but they represent only a small portion of cultivable land, 2.3 percent of the total area held by farmers. One can assume that on the better-quality lands where the rotation scheme applies, the area in farms of less than 2 hectares is greater than the national average. 7.34 The other main policy instruments for implementation of the crop rotation scheme are the provision of inputs on credit by the Agricultural Cooperative Bank and the price policies. Both are severely constrained. Added to the problems with enfotcement of licensing, these constraints make successful enforcement of the crop rotation scheme very dubious. 7.35 The Agricultural Cooperative Bank is the sole institutional source of agricultural production credit (see Volume 3, Annex 2). Furthermore, it has a virtual monopoly in distribution of fertilizer, insecticides and seed. As, according to Law 14, credit will be allocated only to licensed producers, the bank will exercise major power over the implementation of the crop rota- tion scheme. In that context the Annual Agricultural Production Plan for 1976/77 provides that new loans to the amount of SL 391 million will be made to agriculture, representing a 49 percent increase over 1975 (see Table SA 7.27). Of this total 70 percent will be in kind, as compared to 40 percent in 1975. It is doubtful that the bank can raise the capital necessary for such an increase in its volume of loans, and even if it can, it is question- able whether it has the facilities and the experience necessary to assume the burden of enforcing the crop rotation scheme. 7.36 The discharge of those duties of the bank that are not purely finan- cial has suffered in the past from the existence of severe bottlenecks in distribution of fertilizer and their inputs, as there have not been enough warehouses to cover the whole country. This and the problem of limited capi- tal resources have been reflected in the limited number of crops that received credit. The greatest share of financing, more than one-third of total loan volume, has been going into cotton (see Table SA 7.29). A swift expansion of the bank's facilities to permit provision of comparable inputs for other crops would probably be very difficult, even if the financial resources become avail- able. Furthermore, one-third of the bank's loans in the past have gone to cooperatives, a small share to state farms, and the balance to private farms. For the implementation of the crop rotation scheme a much increased share would be required for private farms, according to their importance in produc- tion, and it is doubtful that the institutional mechanism for such a switch already exists. Finally, the logic of the crop rotation scheme excludes from financing, and therefore from the provision of fertilizer and other inputs, small farmers with fewer than two hectares, or farms on rainfed land - 211 - in Stability Zones III and IV, where mean annual rainfall is less than 250 millimeters (10 inches). This will be a major limiting factor for the expan- sion of agricultural production. 7.37 Prices play a very limited role in the implementation of the Plan by virtue of the fact that they are not allowed any flexibility. Prices of fertilizer and other inputs are fixed at generally low levels that benefit the farmer. It is estimated, for example, that the subsidized price of fertilizer to the farmer is about one-half its import cost; on the other hand, the price of Euphrates tractors, produced at the state factory, seems to be about 75 percent higher than the equivalent world price. Most farmers, however, are unable to take advantage of low prices because the inputs can only be obtained in conjunction with Agricultural Bank credit, which is in very short supply. Producer prices are also fixed, well ahead of planting season according to Law 14, at levels corresponding to the "theoretical cost of production" plus 10 percent profit. Fixing prices in this manner allows for variation in profits of individual farmers, depending on whether they are above or below the aver- age efficiency level. On the other hand, as most agricultural commodities (with the exception of fruits, vegetables, milk, meat and poultry) are "vital commodities" in which the state, through the respective General Organizations, has the exclusive marketing monopoly, rigid prices do not permit automatic free-market adjustment of prices in the course of the year to compensate for any miscalculations or failures associated with the Annual Production Plan. Therefore, when the implementation of the physical plan falls short of the target, the adjustment in supply is made by increasing imports. On the other hand, when the Plan's target has been overfulfilled (as was the case with lentils in 1976) the state expenditure on a specific commodity is greater than budgeted and the adjustment is made by fixing the price at a lower level in the next crop year. 7.38 There is no quarrel with the de-emphasis of the free-market mecha- nism in Syrian agriculture. This follows the policy imperative of a socialist state that prices must be set on the basis of need for the consumer to be able to buy food for an adequate diet and for the farmer to be able to cover the costs of production. After all, abrogating the role of the unbridled market mechanism with respect to certain commodities (be it through taxes, subsidies, or price controls) may be an operational way of approaching the "basic needs" strategy of development. Nevertheless, one would like to consider prices as just one of the policy instruments available to planners in pursuing the tar- gets of the plan. From this viewpoint, the combination of fixed crop alloca- tions and fixed prices results in an overdetermined system that allows little freedom either to the planners or to the farmers. This is the basic analytical deficiency of the Syrian Agricultural Plan. Combined with the operational deficiencies discussed above--the levels at which the targets were set and the limitations on resources available--it makes implementation of the Plan less feasible. 7.39 Subject to the feasibility of the Plan, the subsidiary question of consistency arises. In relation to prices, it can be formulated in a number of ways: are the given prices likely to provide the incentives necessary to meet --212 - the projected production targets in various sectors, such as livestock produc- tion or citrus production? The other side of the same coin is the question of whether the projected output for certain commodities can be absorbed at the prices that are taken as given. This question is of special importance in the case of livestock for the domestic market and of citrus for the export market, since dramatic production increases have been planned for both commodities. Similarly are the postulated prices consistent with the intercommodity substi- tution that the planners have projected, such as the substitution of sugarbeet for cotton? Similar questions arise in relation to resource availabilities. 7.40 The rigorous way to address these issues would have been to start from a sectoral planning model for agriculture and to perform tests of optimality, feasibility and consistency. This however is impossible since such a model does not exist. Our task, therefore, in the next chapter where these questions will be raised, will have to be limited, ad hoc, and inevitably impressionistic. FUTURE PROSPECTS 7.41 The preceding evaluation of the Fourth Plan may sound unduly harsh. It is nevertheless realistic, and it is to the credit of Syrian planners that they had realized the fact even before the start of the Plan period. A long debate over the Fourth Plan started in 1975 as the binding constraints within which the Syrian economy since operates became evident. Among these con- straints are: the foreign exchange situation which emerged following the drastic decrease in aid from Arab and Eastern Bloc countries; the foreign debt resulting from borrowing policies followed in the past; budgetary considera- tions; the threat of imported and home-produced inflation; and administrative resources insufficient for extensive exercises in command planning. This debate culminated in the reorganization of the State Planning Commission by Decree number 280/W of November 25, 1976 and in the decision to introduce the Fourth Plan in the People's Assembly to have it ratified on an interim basis, until a new document is prepared. Simultaneously the decision was made on the highest level to cut expenditure on the Plan drastically by shifting all new projects into the "reserve" category and proceeding only with ongoing projects that are continuing or have already been contracted for. The effect of this change is that the targets of the Plan can no longer be considered binding on policymakers. What is even more important, however, is that Syria is currently poised for a basic change in planning approaches, within the context of pragmatic socialism. The end result of this process will not be clear for quite some time but there are some indications of what this change may involve. Important hints in connection with the current rethinking of the institutional economic framework were provided in the Prime Minister's speech of October 1976 to the People's Assembly and in the Symposium on Syrian Agriculture that was convened in Damascus from February 19 to March 1, 1977, and at which the Prime Minister also spoke. 7.42 The impetus for the reexamination of agricultural planning policies has been provided by concern about the sector's development record and by the need to increase self-sufficiency and reduce food imports. In the above- mentioned speeches, the Prime Minister emphasized the need for giving priority _213 - to agricultural development with the view of "doubling the rate of agricul- ture's participation in national income." It was emphasized that this task may be especially difficult for agriculture which greatly depends on the participation of large numbers of farmers, on their motivation, training and persistence. As a result, it requires good planning and a long horizon--more so than would have been required for the development of industry, for example. The emphasis, therefore, is on reaching a more advanced and scientific level of agricultural planning and on examining more carefully the control variables which can be activated. 7.43 The position that the public sector has claimed as the leading sector in the previous plans was noted and lauded. Certain disappointments with the state farms, the agricultural cooperatives and some government organizations, like the General Organization for Cows and the General Organization for Poul- try, were frankly discussed. It appears that the approach being considered is two-pronged. First, it would strengthen the public sector with emphasis on areas of comparative advantage, without necessarily undertaking any new drive to expand it considerably. Second, it would complement the role of t:he public sector by promoting plan participation by the private sector and encouraging private capital investment in agriculture. 7.44 It appears that this new emphasis on the private sector is intended to take advantage of individual initiative, of private knowhow and oE private capital. It would attempt to channel the gains that have been made in the years of rapid economic growth into agriculture, instead of having them go to construction, to speculative activities and to consumer-good imports. To this effect there has been mention of allowing private companies to engage directly in imports of agricultural machinery, and there has even been an invitation by the Prime Minister to Arab and other friendly countries to invest in Syrian agriculture, either directly or through joint ventures. The role of the private sector would be mainly on the production side, where encouragement through pricing policies would receive special attention. Farmgate producer prices for agricultural products are considered generally low, and new pricing guidelines are suggested that would yield a 20 percent return above costs instead of 10 percent, hitherto the rule of thumb. Of the resulting value added in agriculture, 50 percent would go to compensation of labor and 25 percent to return on capital. On the marketing side of agriculture, however, involvement by the private sector has come under attack in instances of specu- lative profits, as in the case of such perishables as milk, meat, vegetables and poultry. The intention is to set up General Organizations for t:he market- ing of such commodities. This we believe is not of the highest priority for Syrian agriculture. First, the record of private trading in such activities seems in general to have provided substantial incentives for increases in production, as in the case of poultry and eggs, while state marketiag has suffered from operating below capacity, at low levels of capital utilization, and has been plagued by deficits, as in the processing and marketing of milk produced by state farms and cooperatives. Second, marketing of perishable commodities would require substantial investment in refrigerator facilities and refrigerated vehicles. The state can more profitably invest these funds in other agricultural projects with higher returns. _214 _ 7.45 There is some evidence that the production activities of the public sector may be more sharply focused in the future. The substantial increase in the number of state dairy farms, for example, that was contemplated in the initial draft of the Fourth Plan will be scaled down, while cattle will be distributed to private farmers and financed by five-year loans at 5 percent annual interest. 7.46 Agricultural research and extension received special emphasis, and the recommendation was to reestablish the Directorate of Agricultural Exten- sion Service in the Ministry of Agriculture and Agrarian Reform. Should this come to pass, it would also represent a reversal of policy, as extension had been specifically entrusted to the state farms and cooperatives since their inception ten years ago. This measure could have considerable impact, as 90 percent of agricultural holdings are outside the State Farms and Agricultural Cooperatives. 7.47 A large number of other agricultural development policies, which signal a change from the past, have also been mentioned. The functioning of (GADEB) 1/ is being viewed with considerable skepticism and the validity of the policies for reclaiming the lands of the Euphrates Basin at full speed and at all costs was questioned. Alternatives suggested include first extending cultivation on the inframarginal lands around Aleppo and emphasizing dryland (rainfed) and arid zone agriculture by building surface dams, promoting animal husbandry, and protecting pasture. Finally, there has been mention of reor- ganizing the Agricultural Cooperative Bank to place more emphasis on medium- term and long-term loans for agricultural development. 7.48 One conclusion that can be drawn from the discussion above is that there is general concern about the record of agriculture and that the sector is receiving new emphasis and top priority. This is also evidenced by the creation of the Supreme Agricultural Council under the chairmanship of the Prime Minister and that of a Committee chaired by the Deputy Prime Minister to process the recommendations reached at the Symposium. 7.49 It would, of course, be premature to interpret the stirrings we have mentioned as new imperatives of agricultural policy; and it would be foolhardy to conclude that Syrian agriculture is about to be thrown to the mercy of unbridled market forces. It is more likely that what the present rethinking of economic policies and institutions signifies is that Syria is at the cross- roads of evolution into pragmatic socialism. The Fourth Plan for Agriculture and Law Number 14 have been steps in the direction of greater regulation and comprehensive planning of the agricultural sector, presumably with the view to eventually place more lands under state farms or other collective forms of organization. Agricultural planning as of 1977 reflects the Syrian Govern- ment's efforts to build the development of agriculture on the points of strength, instead of reinforcing foundations on the weak points, and the search for an eclectic approach to agricultural development. 1/ General Agency for the Development of the Euphrates Basin (GADEB). - 215 - CHAPTER 8 STRATEGIES AND POLICIES FOR AGRICULTURAL DEVELOPMENT 8.01 Successful integration of the agricultural sector into the growing Syrian economy will encompass at least three aspects. First, agricuLture can make a contribution in reversing the drain of foreign exchange that now takes place in importing food and raw materials. Second, agriculture can develop linkages with the other sectors of economic activity: so-called backward linkages through the purchase of agricultural inputs from other sectors and forward linkages through the supply of agricultural raw materials to the processing industries for domestic consumption or export. A commonplace of development is the agricultural squeeze by which earnings skimmed from agri- cultural production by means of such devices as compulsory deliveries, dis- parate sectoral pricing, labor migration, or outright taxation go to augment investment, incomes, and ostensible productivity in the other sectors of activity. Most of these mechanisms appear to have been at work in Syria, although statistical evidence is scant. The third imperative for successful future development in agriculture will be to reverse the flow of net invest- ment so that by growing at a more rapid rate than total gross domestic product, agriculture may increase its structural share in national income. POLICY OPTIONS ON LAND UTILIZATION BY REGION 8.02 Greatly intensified land use has been chosen as a major strategy for achieving the overriding agricultural objective of increased production. This may require regional strategies involving an intricate weighing, of options on the environment and technology to evolve the patterns of land utilization that will give high yields without destroying the ecological balance. The geographic pattern of agricultural growth is greatly influenced by the regional incidence of rainfall and temperature. There is substantial variation in mean annual rainfall among the major agroclimatic stability zones used by Syrian officials as a reference base for agricultural planning (see map at front of this volume). There are also several subzones that can be used to describe more precisely local climatic conditions, potentials and constraints (see Table 8.1). 8.03 The humid and semi-humid areas are the major source of fruit and vegetables. Output in these areas has expanded rapidly and exports of fruit are now being undertaken on a limited scale. The semi-humid areas in the far north have also become limited suppliers of livestock fodder. 8.04 The semi-arid areas are currently devoted primarily to a system of rotation of crop and fallow, with wheat the dominant crop. Recently, incen- tives have been supplied to add lentils to the rotation as an alternative to wheat. Plans are also being made in the areas with mean annual rainfall of more than 400 millimeters (16 inches) to engage in continuous cropping This chapter draws upon the work of Mr. Pan A. Yotopoulos (Consultant). - 216 - Table 8.1: DESCRIPTION OF MAJOR AGROCLIMATIC ZONES AND SUBZONES Area Cultivated 1976 Stability Mean Annual Rainfall (Thousand Zone Subzone (mm) (Inches) Hectares) Description Zone I 1. Humid over 800 over 32 76 Topography of gently rolling to mountainous; deciduous fruits and vegetables grown with terracing; difficult terrain but substantial improvements in management and marketing possible. 2. Semi-humid 500-800 20-32 602 Coastal region, northern Syria; has high potential along coast for vegetables and fruits. Northern areas easily convertible to con- tinuous cropping. Yields well below potential, higher fertilizer applications on all crops possible. Opportunities for the construction of small-scale catchment reservoirs; some additional well irrigation also feasible. 3. Semi-arid A 350-500 14-20 828 Area of high potential for tradi- tional dryland crops; continuous Total, Stability Zone I: 1,506 cropping possible in much of the area; yields below potential; modest fertilizer dosages profitable. Zcne II 4. Semi-arid B 250-350 10-14 1,945 Area will probably remain under crop-fallow rotation; not clear that clean fallow:/ will pay, limited opportunity for increas- ing-fertilizer; herbicides likely to be profitable on wheat. Zones III, Arid under 250 under 10 2,035 Grazing areas will need regulation IV if productivity is to be improved; current demands are eroding the environment; buffer stocks of fodder are needed to assist in reduction of average herd size. Major Euphrates Basir irrigation projects in this area. a/ For a definition of clean fallow, see para 8.17. Source: World Bank. - 217- with either lentils or fodder legumes in the rotation to restore the soil nutrients. 8.05 The arid areas of Syria are devoted primarily to nomadic grazing. Sheep, the most important stock, number about 6 million head, and goats rank second in importance with approximately 800,000 head--excluding lambs and kids (see Table SA 7.17). - 8.06 Irrigation is practiced in all zones. The largest project, the Euphrates Basin, lies in the arid and Class B semi-arid areas. Another large project, the Akkar Plain, lies in the semi-humid zone along the coast. Small- scale irrigation schemes (catchment reservoirs, low-lift pumps, and wells) contribute nearly half the total irrigated area, and are found in many parts of the country. Of particular importance for a growth strategy in xhich a rapid development of small-scale irrigation played a part would be a more systematic exploitation of groundwater in the areas around Aleppo and the Akkar Plain along the coast. 8.07 The country is considered to have a Mediterranean climate with the usual pattern of rain during the winter followed by a long dry summer. How- ever, in Syria the distribution of annual rainfall is unusually concentrated in the December-April period. The result is that in all cultivated areas, except the more humid parts with more than 500 millimeters of precipitation, plant maturation is often inhibited by an exhaustion of soil moisture in early summer. 8.08 An example of the general problem is found in the typical semi-arid region around Aleppo. The moisture content of the soil reaches its peak in early February after the substantial rains that ordinarily occur in the months of December and January. The accumulated moisture is then dissipated rapidly and by early April, the normal flowering period for wheat, available soil moisture is approaching zero. Maturation of the plant takes place during May and early June with very little moisture present. Potential for Increasing Output in Rainfed Agriculture 8.09 The draft Fourth Five Year Plan quite properly placed high priority on increasing the output of dryland (rainfed) agriculture where there is adequate rainfall for increasing cropping intensity. These areas coincide roughly with Stability Zone I, having mean annual rainfall of more than 350 millimeters (14 inches). 8.10 A part of the rainfed area has, of course, much more than 350 mil- limeters of precipitation. For example, the Akkar Plain lying between the sea and the coastal range varies from 800 to more than 1,000 millimeters in the higher elevations. Currently, the area is the major supplier of fresh vegetables and fruit, including citrus. Because of the strong demand for such income-elastic (responsive to increased income) commodities (and the absence of price controls), it is estimated that supplies have increased by seven to eight percent a year in recent years. 218 - 8.11 A major irrigation project scheduled for the Akkar Plain will undoubtedly provide a significant stimulus to regional growth in the future. In the meantime, however, there are several short-run, high-payoff develop- ments that would further accelerate the coastal region's potential. Most important would be the provision of assistance in tapping groundwater sources to provide supplementary irrigation during the summer. Even in the relatively high-rainfall areas along the coast, precipitation ceases in May, leaving problems of winter cereal maturation and inadequate moisture for spring plant- ings of warm season vegetables. 8.12 Management practices at the farm level also need improvement. Yields are low when measured against the standard of other Mediterranean countries with similar climates. Marketing methods are rudimentary and if the export potential of the area is to be realized, they will have to be systematized to insure better quality and delivery standards, even for regional consumption. In the absence of the private grower organizations that have developed in competing countries over time, additional efforts need to be made in improving the spread and efficiency of cooperatives. The Lebanese crisis has given Syria's fruit and vegetable industry an important impetus. However, as the regional situation stabilizes, competition with Lebanon, Jordan, and other Near East suppliers will place a premium on improving marketing and distribu- tion activities. 8.13 The greatest potential for increasing agricultural output in the northern semi-humid and class A semi-arid lands lies in increasing cropping intensities. There is no technical reason why annual cropping should not be introduced in the areas with more than 350 millimeters of rainfall. At this level of precipitation, increases in fertilizer dosage on improved wheat varieties, especially in areas above 450 millimeters, will yield respectable returns. Based on evidence from the wheat improvement programs in neighboring Turkey and Jordan, the use of herbicides to control weeds in wheat is likely to have even higher rates of return. 8.14 The crop rotation program launched under Law 14 of 1975 emphasizes intensification, which is highly desirable in itself. However, as noted in Chapter 7, the potential cropping systems have not been evaluated in economic terms. An example of this failure is relevant to regional development poli- cies with respect to the cereal-fodder rotation. Not only is the agronomic desirability of such crops as vetch subject to question, but the cost of transporting the hay to consuming centers raises important issues regarding the extent to which the northern region has a comparative advantage in produc- ing fodder. Within the cereal-legume rotations, there are also several poten- tial sequences that need evaluation. For example, it may well be that despite the relative decline in yields of wheat-wheat sequences, such a cereal-oriented rotation would produce higher returns than the simple alternation of wheat and lentils. 8.15 Efforts to increase intensities will, of course, require additional inputs. Ordinarily, doubling the cropped acreage does not require doubling the tractor and implement complement. However, in areas where "weedy" or uncultivated fallow is the usual practice, the increase in tractor and har- vester numbers will need to be substantial. Crucial also will be the more - 219 - widespread use of tillage and seeding equipment that will produce a relatively level field so that labor constraints in lentil harvesting and hay making can be alleviated through further mechanization. Currently, seedbeds are so rough that subsequent mechanical operations are very difficult to perform well. Uneven fields also cause excessive breakage of equipment, therebv raising down-time and the costs of production. 8.16 How the additional mechanical inputs are to be provided is an impor- tant decision facing the Syrian government. It would be natural to st:rengthen the cooperatives that are already serving many of the villages and eit:her to create the basis of an expanded form of communal tillage for those operations best performed by tractors or to provide tillage services on a rental basis. It must be recognized, however, that placing the control of equipment in the cooperative sector will necessitate reorganizing the cooperative structure that has been faltering, and will take a substantial increase in material and human resources. A comparison of the private machine shops found in virtually every town in Syria with those being maintained under government auspices provides a substantial contrast in capability and efficiency. Such compari- sons do not necessarily argue for enlisting the private sector in the care and maintenance of equipment, but they do indicate that the public sector performance will need to be upgraded considerably if the goal of substantially increased cropping intensities is to be met. 8.17 The technical and economic potential for increasing output in the semi-humid and class A semi-arid areas is assured. The potentials of the class B semi-arid areas (250-350 millimeters) are more difficult to assess. In other semi-arid areas, substantial increases in the yield of winter cereals have been obtained with an extensive program of fallow tillage. However in the Middle Eastern environment, these procedures have not been as successful as they were in the Pacific Northwest or in Australia. The practice of clean fallow, in which moisture is carefully controlled in the fallow year to permit early planting in the cropped year, is complicated by at least three important factors: soils, the short period over which the annual rainfall occurs, and the high summer temperatures. The net result is that a question remains regarding the extent to which moisture conservation practices that have proved so beneficial in semi-arid zones in other parts of the world are app'Licable in Syria. 8.18 The economics of clean fallow are further complicated by the value of so-called "weedy" fallow for the maintenance of animals. Given t'he lack of fodder during certain times of the year in the arid steppes, weeds growing in cultivated areas represent an important component of the current livestock system. Unfortunately, on the other side of the ledger, experiments in Syria and elsewhere have shown that the appearance of weeds in the cereal crop sub- stantially reduces yields. An extreme example is barley which is commonly severely infected with sinapis. This may explain why the growth in its yield is often not significantly different from zero (Table SA 7.6). Clean fallow is an important element in weed control and, particularly in the absence of well-managed applications of herbicides, the benefits of weeds to animals may - 220 - be outweighed by their adverse effect on yields. (The economic returns to clean fallow systems is high on the research priorities of the new Inter- national Center for Agricultural Research on Dry Areas (ICARDA) to be located near Aleppo.) Potential for Developing Irrigated Agriculture 8.19 Syria's basically Mediterranean climate with its long dry season rewards the development of water resources for irrigation. Until recently, the highest priority had been given to the implementation of projects con- nected with the Euphrates Basin. Such projects still receive the bulk of the resources committed to agricultural development, but planners are also considering raising the priority of other types of small-scale high-payoff projects aimed at rehabilitating low-lift pump schemes and exploiting ground- water potential. 8.20 An example of the change in emphasis is the Akkar Plains proposal being studied by the government in 1977. Comprising some 20,000 hectares of arable land, the Plain is ultimately targeted for surface water development. In the meantime, however, a program is being contemplated that would provide for additional groundwater development in the area. Doubling and tripling of yields is not unusual for warm season crops grown under irrigation. Drilling additional wells would minimize the costs of the distribution system and the lengthy delays that inevitably accompany major construction works. They also provide the kind of precise water control that is crucial to the successful production of fresh vegetables. 8.21 The Akkar Plain needs water. However, it also needs drainage, especially at the micro level. In many areas, surface water tends to collect in low-lying areas and, because of the relative impermeability of the black clay soils, it damages crops before it evaporates. "Bedding", the creation of raised beds on which plants are grown, has been found to be an effective antidote to this condition in other parts of the world and needs to be inves- tigated in Syria. Fertilizer trials are also badly needed in the area. While black soils have a high latent fertility if properly managed, intensive vegetable production is demanding of soil nutrients. Currently, there is relatively little information available on optimum fertilizer use under sus- tained multiple cropping. Lastly, there is an immediate need for more and better windbreaks to counteract the strong winds that are characteristic of the coastal area. 8.22 Reconsideration of immediate priorities for investment in irriga- tion is quite properly being extended to activities in the Euphrates Basin. Currently, 20,000 hectares in the Basin are under cultivation in a series of pilot state farms. An additional 60,000 hectares are in various stages of construction and initial reclamation (see Chapter 7). -921 - 8.23 The difficulties that have been encountered in bringing the land into production are not unexpected and range all the way from the management of the individual production units to engineering problems arising from the high gypsum content of the soil0 (It has been hard to keep channels and canals in working order when leakages dissolve the base on which the distri- bution system has been constructed.) There is also some question about the wisdom of the basin type of irrigation system that is currently in use. It does have the virtue of being relatively simple to operate but has tlne serious disadvantage of creating a series of ridges or bunds that are extremely hard on machinery and produce a high degree of variation in water application. Both foreign and local agricultural experts have recommended that additional resources be spent on the kind of micro-levelling that would make it possible to dispense with the basin system. Given the improvements in irrigation efficiency that would result, as well as the improved performance of the implements and equipment assigned to the project, this suggestion is well worth detailed investigation. 8.24 The relatively low productivity of the pilot projects is as much a function of the scarcity of skilled planners, farm managers, and equipment operators as anything else. This suggests that serious consideration should be given to emphasizing activities that improve the capacity of the projects already constructed rather than attempting to accelerate further large-scale capital investments. There is no doubt about the desirability of eventually irrigating at least a goodly proportion of the 600,000 arable hectares that lie within the Basin. However, there is much to be learned about the most appropriate approach to farming systems in the current project area. Devel- oping a firmer foundation of knowledge concerning optimal long-run cropping patterns as well as on the best approaches to the more immediate problems of reclamation would appear to have a high payoff. A similar argument could be made concerning the provision of additional training activities thal: might be associated with the areas already under cultivation. 8.25 One of the most interesting developments in the area of irrigated agriculture relates to groundwater exploitation in the Aleppo Plain. Wells are being sunk in substantial numbers and roadside observations indicate that some farmers are introducing sprinklers. These are used primarily for summer vegetables, vines and melons, although in bad years wheat and lentils are irrigated during the maturation period. The overall potential for a rapid expansion of this form of development is currently being hampered by a lack of knowledge concerning the recharge capacity of the local acquifers. Estimates of the groundwater situation range from "abundant" to "relatively limited", but judging from the rate at which wells are now being sunk, additional study of the area's water balances should have a high priority. Potential for Range Management and Livestock Production 8.26 Improving the productivity in the arid grazing areas presents a conundrum characteristic of all unregulated pastoral regions. Significant deterioration of Syrian rangelands has occurred as a result of the encroachment of settled cultivation on the marginal areas with 200 millimeters mean annual rainfall, and the increasing population of people and animals on the remainder. - 222 - Experience with rangelands in other arid areas has shown that a deteriorated area has an amazing ability to recover when adequately managed. However, improvements have inevitably involved short-run reductions in use. This is particularly true when the rejuvenation program involves the seeding of atri- plex and other nonindigenous drought-and-salt-tolerant plants. The establish- ment of these species requires that lands be withdrawn from use for a period of from two to four years depending on land quality and local precipitation. Moreover, after the vegetation is established, controlled grazing must be practiced. It is therefore unrealistic to expect that the benefits of a more effective integration of livestock and sedentary agriculture in Syria will be realized without a comprehensive range management plan and a substantial com- mitment of material, administrative, and political resources to implement it. Indeed, there is a real danger that responding to the perceived needs of the area's inhabitants--for example, by drilling wells so that the flocks do not have to trek so far to water--will only exacerbate the situation. 8.27 The same might be said of proposals to provide buffer storage of fodder against drought years. Such programs would indeed diminish the waste- ful sacrifice of herds when, in a bad year, grazing is not available. How- ever, if the reserve is not also accompanied by a management program that holds the total number of animals relatively constant, it may merely increase the rate of deterioration of an already overburdened ecology. On the other hand, reducing the fear of drought may also reduce the propensity of the Bedouins to build up herd size in anticipation of forced sales. 8.28 Rainfed cropping systems are dictated almost entirely by agro- climatic conditions. To some extent this is also true of livestock, the grazing activities on the steppe being a case in point. However, Syria has recently embarked on an ambitious program of expansion in production of milk, meat, eggs, and poultry. Because such facilities can be located with less concern about the agroclimatic conditions than crops, the issue of regional comparative advantage in agriculture becomes more crucial. 8.29 Until recently, it was assumed that substantial amounts of hay would be produced in the areas of northern Syria with more than 400 millimeters of rainfall. However, transportation costs from such areas appear to be prohibi- tive even if the technical difficulties of hay making are overcome. For example, the limited information available suggests that dairymen around Damascus are able to obtain fodder from nearby farmers at much less than they would pay if it were coming from, say, the Qamishliye area. This suggests that it may be necessary to develop livestock activities in the fodder produc- ing area and ship high density products such as slaughtered meat, condensed milk, and butter to the major points of consumption. 8.30 Most livestock investments currently being planned are relatively intensive and rely on confined herds and flocks. However, increases in the output of certain types of livestock products could be brought about by an improvement in the integration of nomadic and sedentary agriculture. For example, if it were possible to reduce the grazing period and the density of - 223 - Bedouin flocks in the desert by treating them as an intermediate input into livestock fattening activities, it might be possible both to improve range management and to provide a low-cost source of young animals. 8.31 In a subsequent section we take up the question of the types of incentives needed to insure that regional comparative advantage is being exploited. The current policy of ensuring uniform input and output prices throughout the-country clearly has adverse effects on the efficiency of resource use, however desirable its distributive effects might be. As long as transportation cost differentials among regions are not reflected in rela- tive prices, efforts at regional integration will continue to produce sub- optimal solutions. The Equity Impact 8.32 It is obvious that any set of development priorities will have differential effects in terms of the benefits conferred by region. W'fith supplementary irrigation, substantial increases in cropping intensity and yields per hectare can be achieved in the high-rainfall areas. However, the same irrigation projects that have relatively quick payoffs, clearly create imbalances with those parts of the country having an unfavorable resource endowment. Equally obvious is the fact that investment expenditures applied indiscriminately to areas of low and high potential would have severe adverse effects on the productivity of investments. Experience in other part:s of the world has shown that attempts to create participation in the country's development by ensuring equal development for all regions are prohibiLtively expensive. 8.33 There are several alternatives to equal development in all areas once the mobility of the human agent is recognized. Ordinarily, backward regions are also the last to receive the benefits of improved educat:Lonal opportunities, social services and the like. As a result, migrants are poorly prepared to enter the job markets in the more rapidly growing regions and a cycle of relative poverty and low expectations is perpetuated. 8.34 In many parts of the world, especially in advanced industrial coun- tries, exporting people and skills from the country's backward regions would have only the merit of a more efficient use of national resources. 'However, in Syria, as in many other developing societies, family and village ties remain strong. There is much evidence to suggest that those who migrate to growth centers in Syria or neighboring countries have consistently returned a substantial portion of their earnings to their place of origin. Indeed, in some countries of the Middle East, remittances from nationals working abroad form a major item in the country's balance of payments. Mechanisms for insur- ing some equity in income distribution among regions with disparate resource endowments are few; it would be well to consider how the strong family and territorial allegiances that exist in a traditional society can be used to support broad-based regional participation in development. -224 POLICY OPTIONS ON PRICES 8.35 Within any economic system, prices function at once as a mechanism for allocation of resources and as a mechanism for distribution of income. The efficiency and the optimality with which these functions are discharged by prices is only weakly, if at all, related to whether prices are free or con- trolled. It is a misconception based on the figment of perfectly competitive markets that a free-market system will automatically achieve allocative effi- ciency and distributional equity--even though equity may be narrowly defined as rewarding according to marginal productivities. In fact, prices may dis- tort both the allocative and the distributive mechanism when, for example, they are systematically biased within an imperfect market framework so that the poorest socioeconomic groups happen to pay higher prices (for credit or fertilizer, for example) and receive lower prices (for output that they have to sell immediately after harvest). It is also a misconception that by rigidly controlling prices a planner will cancel the allocative and distri- butive functions they perform and will leave these to be discharged through other instrument variables, such as plan allocations and profits of public enterprises. In fact, fixed prices operate by default to create unplanned distortions both in allocation and in distribution. 8.36 The discussion in the previous chapter of the functioning of agri- cultural costs and producer prices within the planning mechanism in Syria made it abundantly clear that the role of prices is suppressed and an attempt is made to cancel their allocative function and to deemphasize their operation as a mechanism for distribution. The result has been an overidentified system that was not allowed sufficient freedom to operate. In this section we will examine more closely the allocative and distributive implications of the price system that exists in Syria, specifically for the agricultural sector. The Institutional Framework 8.37 Of the four-tier price system described in Chapter 5 and its Appendix A, the categories that become especially applicable for agriculture are the ones under central control (direct and indirect) and to a limited extent the free-market price category. The producer prices of the majority of agricul- tural commodities are within the first category, fixed and centrally control- led. This system is enforced through state agencies (such as the Milling and Marketing Organization for Cereals) that become the sole purchasing and market- ing agents for these commodities. The fixed producer prices apply at the central purchase points, of which there are several in each province. As an adjunct to the implementation of the system, private transport of these commodities across provincial boundaries is prohibited, and the state bears the cost of transportation from the collection points to the processing or consumption centers. The farmer, however, pays the cost of transportation to the collection points, and this free flow of commodities within provinces implies that there is a free market for these commodities within the provinces which has been recognized as a market that can cater to local use and that becomes operational when the controlled price is below the "equilibrium price". -225 - Occasionally such trade transcends the limits of a province and an active black market develops. This, for example, happens with barley especially in drought years when demand is strong. Moreover, it is a simple extension of this system to have the local free market also cater to "border trade." for the provinces adjacent to neighboring countries, especially Lebanon, Jordan, Iraq and Turkey. Predictably, there are no data on border trade, but it appears that at times it is brisk, especially for live animals and also for commodi- ties subject to price control at prices lower than those in neighboring countries, such as cotton, sugar and occasionally wheat. 8.38 A subset of these commodities that are considered "vital" receive a direct subsidy that makes their consumption price lower than their producer prices (see Chapter 6 and its Appendix 6A). Examples are bread, sugar, rice and vegetable oil. The consumer prices of the rest of these commodities vary, and in some cases, such as cotton, they are significantly higher than the producer prices. 8.39 Perishable agricultural commodities are the second category and on these free-market pricing prevails. They are typically fruits and vegetables, meat, milk, poultry and poultry products. The exceptions are meat, controlled to some extent in Damascus by a State Meat Marketing Organization whLch is the sole supplier of mutton to butchers; and milk produced by state farms and cooperatives, sold to the processing plants, which are all state-owned. This last exception creates an interesting oddity in Syria, since milk-processing plants work below capacity and sell their products, such as homogenized milk, at prices lower than the free-market prices for unprocessed products. 8.40 Agricultural inputs are generally subject to price control and some of them, like fertilizer, are sold to qualifying farmers at substantial discounts. 8.41 This brief description of the institutional framework is sufficient to suggest that the price structure in Syrian agriculture is enormously con- fused. There exist controlled prices of major commodities, with differentials added on for quality and as incentive payments--usually for early delivery to the collection center. There are controlled prices of inputs, with subsidiza- tion of credit (which varies for state farms, cooperatives and private farms), subsidies on certain inputs (such as fertilizer) and implicit taxes on others (such as agricultural machinery which sells at times at prices 75 percent above the equivalent prices in world trade). There are also consumetr subsi- dies, black markets, capital rationing, uniform prices without respect to transport costs, and control over profit margins and wholesale and retail markups. 8.42 Examination of Table 8.2 suggests that controlled producer prices have been characterized by great stability, at generally low levels, for the greatest part of the past decade. Prices of wheat, cotton, bar]ey, lentils and sugarbeet were virtually unchanged from 1967 to 1971. Hlowever, - 226 - the recent substantial increases in world grain prices have been reflected in a significant increase for these commodities in Syria as well, and prices have more than doubled since 1971, except for that of cotton. Table 8.2: CONTROLLED PRODUCER PRICES FOR MAJOR AGRICULTURAL COMMODITIES, SYRIA, 1967-77 (Syrian Pounds per Metric Ton) /a Year Wheat Cotton Barley Lentils Sugarbeet 1967 250 800 200 - - 1968 260 800 160 - - 1969 265 800 168 370 65 1970 250-265 800 125-130 450 65 1971 275-335 800 175-230 400 68 1972 315-365 840 225-230 440 65- 70 1973 365-435 900 275-340 500- 530 80- 88 1974 440-500 1,150 350-380 600- 636 115-130 1975 532-570 1,350 400-455 1,150-1,250 125-140 1976 468-565 1,450 440-468 1,250-1,350 130-145 1977 500-545 1,700 440-468 1,000-1,100 130-145 /a For the dollar value of the Syrian pound, Table SA 3F.1. One Metric ton is equivalent to 1.102311 short ton or 0.984206 long ton. Prices vary by grade. Where a range is not shown prices are for most common variety and top grade and the average price would be somewhoat lower. Source: Ministry of Agriculture and Agrarian Reform. The Resource Allocation Function of Agricultural Prices 8.43 One--and probably the weakest--aspect of the allocative function of prices appears at the international level and relates to the pursuit of a country's comparative advantage in world trade. In a world of foreign exchange controls, balance of payments deficits, and barter trade agreements, what appear as disequilibria in domestic and world prices have to be carefully studied--by calculating domestic resource costs or effective rates of protec- tion--in order to draw the definite conclusion that resources are being misallocated. Such data do not exist for Syria. But even if they did exist and indeed revealed an actual disequilibrium, domestic price distortions, within limits, could still be justified by invoking the political objective of self-sufficiency or as an attempt to insulate the national economy from the vagaries of international trade and world price fluctuations. As a result, the small divergence of Syrian prices from world prices that shows in Table 8.3 is not considered alarming. Sugarbeet are the exception because the divergence is significant and especially since Syria has launched an ambitious program for increasing production which creates higher opportunity costs for domestic cotton production and which, if successful, is likely to overshoot - 227 - the self-sufficiency target and aim at exports of sugar at lower world prices and with uncertain market outlets. This case will be discussed in det:ail below. The cotton price to Syrian producers is significantly below world prices, with the difference representing a tax on producers that will also be discussed below (see Table 8.3). Table 8.3: SYRIAN PRODUCER PRICE, WORLD PRICE AND RETAIL PRICES IN NEAR EASTERN CAPITALS, 1976 World Syrian Producer Price Price US$ US$ / SL per Retail Price SL Per Kilogram per ton per tora kilogram Damascus Beirut Baghdad Amman Wheat 110 /b 132 .52 .67 .70 .66 .38 Barley 103 /c 108 .42 .57 .59 .59 .32 Cotton 592 /d 372 1.45 - - - - Sugar Beet 21 /e 35 .41 - - - - Sugar - - - .85 1.23 1.71 1.22 Flour - - .85 .62 .51 .46 Vegetable Oil - - - 1.60 3.70 2.2.0 - /a Internal price converted at SL 3.90 = $1.00. /b November 1976 price f.o.b. USA. /c December 1976 price f.o.b. Minneapolis for No. 3 or better quality. /d Assuming a 30 percent ginning outturn and based on January-June 1976 average c.i.f. N.E. Europe for lint of equivalent grades to SyriLan cotton. /e Assuming 12 percent extraction and based on a December 1976 raw sugar price of 8 cents per kilogram f.o.b. Caribbean port. Source: Central Bureau of Statistics; Ministry of Agriculture and Agrarian Reform. 8.44 The table's comparison of Syrian prices to those of neighboring Arab countries has some implications for resource allocation and income distribu- tion. The producer prices of wheat and barley are lower in Syria, anld so is the retail price of sugar. There are indications that there is substantial border trade in these commodities. This means that Syrian resources are misallocated and the Syrian consumers (and the state, through the General Organization for Sugar in the case of sugar) subsidize the consumers of the neighboring countries. 8.45 At the national level, the maintenance of uniform prices creates fundamental regional distortions and misallocations. The maintenance of regionally uniform prices for agricultural outputs and inputs throughout the country is laudable as an equity measure. Moreover, it is necessary, if centralized control and state marketing of agricultural commodities are to be made viable by eliminating the incentive for private trading. The mechanism - 228 - for the maintenance of regionally uniform prices is the elimination of trans- port cost differentials. Most commonly, government trucks are used for transporting agricultural commodities, without cost to the farmer. This creates severe bottlenecks especially in the harvest months, when farmers are allowed to use private transport and get a flat-sum refund that is actually lower than the cost of transportation. As a result of this system, the use of resources does not reflect a locational comparative advantage. For example, hay is trucked from the northern areas to the vicinity of Damascus in order to supply the fattening stations located there. It would, of course, have been cheaper if animals were fed to more acceptable weights close to the source of the feed supply and were transported to the consumption centers only for finishing purposes. Similarly, the regions closer to the population centers would have a comparative advantage in the production of perishables and commodities with high transport costs, whereas under the present system they are locked into fixed crop patterns with no regard to transport costs. A review of price and subsidy policies that would move the country in the direc- tion of exploiting locational advantage ought to be high on the Government's list of agricultural priorities. Such policies, it must be noted, are not inconsistent with government control or ownership of the means of transport. 8.46 We have already noted in the previous chapter that prices are not generally used as allocation mechanisms in planning agricultural production, and this deprives planners of an important control variable. The example of fertilizer, among inputs, has been mentioned before, as being allocated on the basis of purely agronomic norms reflected in the input balances, and no flexibility is given to the farmer to use more or less as the individual conditions of his field would dictate on the basis of marginal productivity considerations. Water is another example of input that may be misallocated, as its price varies from SL 70 to SL 250 per hectare on the basis of the amortization cost of the waterworks rather than on the basis of usage and marginal productivity of the water. A similar case involves the rental of land, which varies from a nominal 5 percent of total output for state lands to 20 percent for private nonirrigated lands and 25 percent for irrigated lands (although different share arrangements are also common as long as they are not disputed by the contracting parties). 8.47 It is the physical targets of the plan rather than relative price ratios that are relied upon for determining substitution among commodities and the output mix. This poses two problems. First, the prices may be fixed at levels that are not consistent with the allocations prescribed by the plan, and as a result may provide an incentive to violate them. This is evidently a common occurence. In 1974 the declared objective of expanding wheat planting on irrigated land, at the expense of cotton, was accompanied by a contradic- tory decision to raise cotton prices relative to wheat in comparison with the previous year. Similarly, the current emphasis on sugar beet production at the expense of cotton is not coordinated in terms of relative prices and rates of return to the two commodities, as we will suggest below. The case of lentils, the price of which almost doubled between 1974 and 1975 and increased by another 10 percent the following year, demonstrated the responsiveness of Syrian farmers to price incentives. They abolished fallow and used lentils for 70 percent of their intercropped area to increase output by 100 percent 229 over the normal levels of recent years, thus creating costly carryover stocks for the Milling and Marketing Organization for Cereals. In view of this situation, the price of lentils was set 20 percent lower in 1977. These examples illustrate that central market control provides price stability at the cost of a considerable sacrifice of flexibility in the planning process. 8.48 The second problem that arises concerning the impact of prices on intercommodity substitutions is that the commodities which remain outside central control provide the only haven for unrestricted private initiative and may as a result reflect the forces of unfettered competition magnified. Fresh fruit, vegetables, meat to a certain extent and especially poultry have become dynamic branches of Syrian agriculture in the 1970s because they are largely free from centralized controls. Their contributions in increased output are welcome, yet serious concern has surfaced about the existence of huge profit margins; especially at the marketing level. Data do not exist to analyze profit margins, but if it appears that market pricing is a problem, it is unlikely that it will be solved through centralized marketing of t:hese commodities. Besides the specialized equipment that the government would have to purchase for such marketing, it would also introduce delays, inefEiciencies and non-market-clearing rigidities in the perishable commodities that can least afford them. An alternative approach that has proven successfual in the experience of other countries is for the government to establish "model units" that compete with the private sector and thus set the effective price ceilings. Efficient state farms could serve as model units in production, setting the benchmark on cost levels, and they could also serve as research, experiment and extension stations to aid the modernization of private farms. State farms and cooperative marketing would complete the circuit by establishing profit margins and putting pressure on prices to stay within certain limits. This situation, however, may be beyond present capabilities in Syria. State farms are the laggards rather than the leaders in agricultural development and the experience with cooperatives has been disappointing in general. If these institutions cannot be revitalized to assume the "model unit" function, the present system is still the second-best alternative and the option of creating marketing boards for meats and vegetables would be an inferior solution. The Income Distribution Function of Agricultural Prices 8.49 The distributive function of prices may encompass several aspects, such as intrasectoral distribution (among branches within a given sector of economic activity), intersectoral distribution (among sectors of economic activity) and income redistribution. It is discharged through taxes and subsidies that are built into the price system and through characteristics of the price system that are not "neutral" in their tax/subsidy impact on different social groups and economic sectors. Analysis of the distributive function of prices always poses difficulties, and especially so in Syria where a large number of prices are centrally controlled and many taxes and subsidies are concealed, both for consumers and for producers. The discus- sion that follows, therefore, will be more impressionistic than defLnitive. - 230 8.50 The intrasectoral transfer takes place through administered prices of output to the extent that they diverge from market-equilibrium prices and through administered prices of inputs, as long as they vary depending on the input use. An example of intrasectoral transfer through control of the price of output is the case of cotton. The Cotton Board realizes a significant surplus through the substantial difference between producer prices paid and revenues received from export sales at world prices. Most of this surplus is returned to the general fund, from which in turn resources are drawn to cover input subsidies to agriculture. In effect the process implies that the more productive cotton subsector is "taxed" to subsidize cultivations of lower productive potential and projects of high administrative cost. This form of implied taxation of agriculture is broadly based since about 20 percent of all farming households are cotton growers and are subject to this "tax". 8.51 On the input side, the intrasectoral transfer favors the crops that qualify for preferential distribution of materials and credit. Similarly, state farms and cooperatives are also, given preferential or subsidy consider- ation over and above that extended to private farms which are in otherwise identical positions. Another form of intrasectoral transfer has to do with the distribution of the factor incomes comprised in value added. The share of labor in agricultural value added in Syria has hitherto been estimated at around 30 percent which is lower than what one would have expected from com- parable experience in other countries. Where employment in agriculture does not coincide with the ownership of land, as is the case for large operations or state farms, this squeeze of labor also has implications for personal income distribution that favors recipients of profit or rent. In the case of state farms and cooperatives this aspect is especially important since labor is paid roughly SL 10 per day, as compared to a wage rate in the private sector of SL 20 per day. 8.52 This transfer of surplus out of agriculture, which subsidizes the other faster-growing sectors of the economy, takes place through a number of instruments: compulsory deliveries, prices controlled below equilibrium levels, decline in terms of trade between agriculture and non-agriculture, taxes specific for the sector, and outflow to the urban sector of labor for which agriculture had borne the cost of sustenance and education. It appears that in Syria all of these mechanisms have been in operation. The agricul- tural sector has been a net exporter of capital to the rest of the economy. Any attempt, however, to assess the relative magnitude of these net flows from the agricultural sector would rest on unsupported assumptions concerning quan- tities of inputs and outputs and equilibrium prices. 8.53 Of special importance for the present discussion would have been the precise calculation of the price relationships between agriculture and other activities. This is impossible, however, because we lack detailed price infor- mation on the items that rural households produce and the sectors of origin of those they consume. If the conversion factors used to arrive at constant 1963 price series for gross domestic product originating in agriculture are calcu- lated as a percentage of those used for GDP originating in industry, the following relationships emerge (prices in industry equal 100): - 231 - 1970 1971 1972 1973 1974 1975 1976 Agriculture 100.0 108.6 115.7 96.2 69.2 64.4 61.5 The inflation of industrial prices in relation to agricultural Drices suggests an accelerated flow of surplus out of agriculture that, if not offset., will further stem the sector's growth. 8.54. Income redistribution takes place as producers are "taxed" by receiving lower than equilibrium prices and consumers are subsidized by the same stroke, with an added subsidy provided by the state when the consumer price is lower than the producer price, as is the case with the great:est number of "vital commodities" (see Chapter 6, Resource Allocation ancl Pricing). In this situation the producers become poorer by the amount of the "l:ax" while the consumers become richer by both the amount of the "tax" and the extra state subsidy. Inflation that may be caused by fiscal deficits to finance the subsidy can lead to another round of redistributive effects. AGRICULTURE AS A LEADING SECTOR 8.55 The balanced development of agriculture within the growing Syrian economy would encompass at least three aspects upon which we have already touched. First, agriculture will benefit from the growth of the other sectors and will also contribute to their development through the creation of linkages: The backward linkages connect agriculture with the other sectors through the purchase of inputs; while the forward linkages make agricultural output available to other sectors as raw materials for further processing. Second, agriculture is also normally viewed as contributing "surplus", or investible funds, for the development of the other sectors of a growing economy. Our preceding analysis of the agricultural squeeze suggested that agriculture has most probably been drained for the benefit of the other sectors in Syria, and the exclusive emphasis on agricultural development in the Euphrates basin in recent years has starved agriculture for operating capital and has neglected alternative investments. A net capital inflow into the sector would be necessary in order to catch up and satisfy the unmet capital needs of agri- culture. The third aspect of successful agricultural development consists of stemming the import of vital foodstuffs and raw materials and the ensuing drain of foreign exchange. The drive to self-sufficiency and the attempt to identify areas of "import savings" for the primary sector are at the center of this role for agriculture. The following paragraphs deal with this role of agricultural development. The Drive for Self-Sufficiency 8.56 Achieving agricultural self-sufficiency is one of the development objectives in Syria, and in successive Five-Year Plans relevant targets for agricultural production have been set. Yet an aspect of the legacy of the past that has neglected agriculture is the underinvestment in data. No house- hold budget studies have ever been conducted. As a result the notions about - 232 - price and income elasticities of demand for agricultural commodity groups are vague. The targets of self-sufficiency are commonly set on the basis of assuming population elasticity for food consumption equal to unity 1/ which is the best that can be done since consumption data do not exist and estimates of domestic disappearance 2/ on a commodity basis are derived as a residual. Similarly, farm survey studies have never been conducted and production elas- ticities, especially for-labor, are totally lacking. As a result, the means for achieving self-sufficiency are usually described in terms of material balances that focus exclusively on land, machinery capital, and chemical- biological inputs. 8.57 The Syrian government should assign high priority to the collection of more detailed data at the farm and household level. Given the importance of administered prices for economic planning and for the conduct of social welfare policy in Syria, it is imperative that more accurate information be used about price and income elasticities of demand for agricultural commodi- ties by socioeconomic group. These could form the basis for intelligent judgements on the extent to which manipulation of demand may enter the objective of achieving self-sufficiency. They would also form the basis for differentiating the subsidy policies for "vital" commodities so that only those socioeconomic groups whose basic needs would be unmet without the subsidy will be favored. Similarly, production elasticities at the farm household and agricultural commodity level would help decide the output mix of a viable self-sufficiency policy. 8.58 Over the two decades 1955-1975 the growth of agricultural output has not kept pace with population growth. Between 1960 and 1975 overall production of cereals grew by 1.4 percent per year, while population was growing by 3.3 percent per year. As a result Syria has turned from being a net exporter of cereals in the beginning of the period to importing substantial quantities of wheat.3/ The deficit in the basic foodstuff, along with imports of other agricuTltural products, such as fruits and vegetables and sugar has contributed directly to increased government subsidies and the worsening of Syria's international merchandise trade balance, and indirectly to the deterioration of the budgetary and balance of payments position. If these trends should continue, Syria's prospects for achieving self-sufficiency in food requirements (including cereals) while not impossible, do not appear very bright. 1/ The population elasticity for food consumption is defined as the ratio of percentage change in population, to that in food consumption. 2/ Domestic disappearance refers to domestic consumption, in the estima- tion of food balances. 3/ As an example, in 1963 Syria exported 181,300 tons of wheat and 401,800 tons of barley, whereas in 1975, despite a bumper crop, neither barley nor wheat were exported (Table SA3D.2). - 2331_ 8.59 An attempt to evaluate directly the prospects of Syrian self suf- ficiency in food by 1990 is hampered by the lack of data mentioned earlier and by the widely fluctuating record of agricultural production that makes the choice of a base period difficult. One set of projections, made by the International Food Policy Research Institute (IFPRI) suggests deficits of 41 to 52 percent of cereal consumption requirements by 1990 (see table 8.4). These projections are based entirely on international evidence which tend, however, to overlook the Syria specific situation, particularly with respect to production. As a result, the World Bank projections for self-sufficiency in cereals are based on the estimates of the International Food Policy Research Institute (IFPRI), as modified to reflect more accurately the Syrian situation. The assumptions made in World Bank projections are presented in detail so that the reader can do his own evaluation of the plausibility of the resul.ts. TABLE 8.4: INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE PROJECTIONS ON CEREAL PRODUCTION AND CONSUMPTION PROSPECTS FOR SYRIA A. The 1960-1975 trend data for 1975 was used as the basis of the projections instead of the actual 1975 data. 1975 in '000 metric tons Estimated 1960-1975 1/ Actual Trend Estimate Production 2,201 1,554 Consumption 2,445 2,000 Population 7,410 7,378 1/ The historical trend growth rates for 1960 to 1975 were derived from equations based on the log of the values: 1960-1975 Production Area Yield Cereals 1.38 -0.22 1.60 Wheat 2.46 -0.07 2.53 Rice no data for 1960, 1971, 1972, 1973 4.29 0.02 4.09 Coarse grains, barley, millet, sorghum,... -1.45 -0.97 -0.48 - .234 - B. The 1990 estimates for production and consumption are: Cereal production growth rate necessary to meet Cereal domestic cereal Consumption 1/ Production 2/ Deficit consumption demand ---------------------- '000 metric tons ------------------ a. Constant 1975 per capita cereal consumption levels 3,257 1,910 1,347 5% b. Low per capita income growth 3,482 1,910 1,572 5.5% c. High per capita income growth 3,555 1,910 1,642 5.7% d. Based on 110% of FAO per capita dietary requirements 3,991 1,910 2,081 6.5% 1/ The historical growth rate 3.3% per annum was assumed for the projection of population. Two per capita income growth variants were used for the projection of consumption: A high variant based on a 1.5% per annum GDP/capital growth rate and a low variant of 1.125% per annum GDP/capital growth rate (i.e. 25% lower than the high variant). 2/ The historical trend growth rate of 1.4% per annum was assured for the projection of cereal production. Source: International Food Policy Research Institute, Food Needs of Developing Countries: Projections of Production and Consumption to 1990 (Washington, D.C.: International Food Policy Research Institute, December 1977), Tables 19, 20 and 21. _ 235 _ 8.60 In projecting production of cereals from 1975 to 1990 two alterna- tive assumptions were made as to the base-year output. First, the act:ual 1975 output of 2,151 thousand m.t. is probably an optimistic base since it reflects the extremely favorable weather conditions of that year. Second, a more moderate estimate, the average of the years 1963, 1970, 1974 and 1975, of 1,759 thousand m.t. (Table SA7.42) was used.1/ The base-year outpuat is assumed to grow at an annual rate of 1.38 percent, which is the trend value for the period 1960-1975. The results of the two alternative projections appear in Table 8.5. 8.61 The consumption of cereals was projected on the assumption of an annual rate of growth of population of 3.3 percent, which makes for a popula- tion estimate of 11,863,000 in 1990. The per capita consumption of cereals in 1975 was estimated on the basis of two alternative assumptions. First, by assuming per capita consumption constant at the 1975 levels. The actual value, however, of the 1975 per capita disappearance of 334 kg (Table! SA7.42) is high by international standards and undoubtedly includes a quantit:y of cereals that leaks to "border trade" in a bumper crop year (see para.. 8.44 above). As a result, the per capita consumption of 271 kg was used iinstead, which is the trend value of the 1960-1975 consumption base and assuming an annual rate of growth in per capita income of 3.0 percent and an income elasticity of demand for creals of 0.05.2/ These are the standard assumptions also used in the IFPRI calculations. The results of the two projections appear in Table 8.5. 1/ The base-year output of the IFPRI.projections is the 1960-1975 "trend- line" output of 1,554 thousand m.t. This is considered an extremely low base. 2/ If the 0.20 income elasticity of demand based on FAO data (Table SA7.43) were used the magnitude of the deficit would be larger than estimated in the World Bank projections but still smaller than estimated in the IFPRI projections. -236 - Table 8.5: WORLD BANK PROJECTIONS FOR PRODUCTION AND CONSUMPTION OF CEREALS, 1975-1990 (thousand metric tons) Constant 1975 Production Consumption Production Consumption base base Function Base Base 1990 per Capita - 2151 - 1759 - Estimate 2151 - 1759 Consumption /a 3216 3386 Production /b 2641 2160 2641 2160 Deficit 575 1056 745 1226 Rate of growth in production required to cover deficit 2.7 4.1 3.1 4.5 (percent per annum) /a Annual rate of growth of population, 1975-1990, was assumed at 3.3 percent. The 1990 population figure is 11.9 million. /b Annual rate of growth of production, 1975-1990, was assumed at 1.38 percent. /c The base-year per capita consumption was 271 kg. This is the estimated value from the logarithmic trend-line fitted to the actual data of 1960-1975. /d The per capita consumption of the base-year is assumed to change as a re- sult of changes in per capita income, given the income elasticity of demand for cereals. The consumption function used is C199 = C1975 (1+gn)'5 where g is the rate of growth in per capita income of 3 percent per year and n is the income elasticity of demand of 0.05. Note that this income elasticity of demand is a quarter of the 0.20 income elasticity of demand estimated by FAO for 1972-74. /e The base-year production is the actual 1975 value. /f The base-year production is the average of the years 1963, 1970, 1974 and 1975 of Table SA 7.42. Source: Table SA 7.42 and International Food Policy Research Institute, Food Needs of Developing Countries: Projections of Production and Con- sumption to 1990 (Washington, D.C.: International Food Policy Research Institute, December 1977), Tables 19, 20, 21. - 237 - 8.62 The combination of the consumption and production projections for 1990 yields a deficit that ranges from 575 to 1,226 thousand m.t. which amounts from one-fifth to one-half of the domestic production (Table 8.5). At the upper limit this is equivalent to a three-fold increase over the 19-75 cereal deficit. If per capita consumption levels are maintained the tc,tal deficit would have to be imported with adverse consequences on the balance of merchandise trade.l/ 8.63 To ensure that the 1990 per capita domestic consumption requ-irements of cereals can be met from domestic production alone, output must grow at an annual rate ranging from 2.7 to 4.5 percent, instead of the rate of 1.38 percent that was assumed.2/ 8.64 Such an increase, however, while difficult to achieve, is not impossible. The increase in cereal output is a function of the increase in the area devoted to cereal cultivation and the increase in yield per unit area. It is obvious that a significant net increase in the overall area available for cereal cultivation added to yield increases will contribute substantially more to increasing output than would relying on the relatively slow increase in yields alone. Although there is some evidence that the statistics for 1960 are not accurate, between 1960 and 1975, the trend was for the area devoted to cereal cultivation to decrease marginally by 0.22 percent per year, partially offsetting the increase in yield of 1.60 percent per year, leading to a net increase in output of only 1.38 percent per year. The irrigated area devoted to cultivation of cereals, particularly wheat, increased steadily throughout this period both in absolute area and in its share of total irrigated land under crop, reaching one third of the latter in 1976. The overall decline in cereal acreage was due to an absolute decline in the rainfed area devoted to wheat and barley. 8.65 In the decade 1967-76 the area devoted to wheat and barley cultiva- tion, by far the most significant cereals grown in Syria, occupied three quarters of total rainfed land under crop and perhaps 37 percent of rainfed land in cultivation (crop and fallow). The total cultivated rainfed land area 1/ The corresponding projections of IFPRI place the 1990 deficit from 1,703 to 2,437 thousand m.t. The main difference in the projections is due to the different base adopted for production. 2/ A more detailed analysis of Syria's future cereal requirements would have to take into account the income elasticities of various food crops. With increasing per capita income it is likely that higher protein food items will be substituted for cereals in the average diet. The reduction per capita in direct cereal consumption may be partially or totally offset, however, by the indirect cereal consumption requirements, in the form of fodder for the livestock (meat) and chicken (eggs) industry. In particular, the per capita consumption of wheat may increase as barley is gradually phased out of the diet of the rural poor (and of others during draught periods). Thus, the upgrading of the diet of the poor may compensate for any decline in the per capita cereal consumption of the non-poor. - 238 - in turn accounted for two-thirds of total unirrigated cultivable land in 1972-74 (Table SA 7.1). The 50:50 ratio of land under crop cultivated to fallow land represents an alternating cultivated-fallow cropping sequence of one year under fallow and the next under crop.l/ To increase the rainfed area available for cereal cultivation the cropping intensity on unirrigated cul- tivable land would have to be increased by shifting to a sequence of two years under crop to every year under fallow, resulting preferably in a 70:30 crop to fallow ratio in any given year. To retain the continued fertility of the soil in this sequence it will be necessary to increase substantially the quantity and quality of fertilizers applied to the soil. To retain the 1976 ratio of land under cereals to total rainfed land under crop, three-quarters (850,000 hectares) of the approximately 1.1 million hectares could be allocated to the cultivation of wheat, the crop in which the deficit is likely to be most severe. This increase in the area under wheat cultivation would produce an additional minimum of 520,000 m.t. of wheat at the 1975 yield levels. This is sufficient to cover at least the low estimate of the 1990 deficit. 8.66 The intensity of farming could also be increased to raise yields. However, as in the case of the area devoted to cereal cultivation, this too will require a substantial modification of past practices. In particular, the organization and timing of the production process (the appropriate allocation and sequence of the inputs) would have to be improved first, by direct inter- vention in the form of price and income incentives that would ensure compliance with an overall production plan and second, by the provision of appropriate extension services and credit facilities. 8.67 Despite the crudeness of these projections they suggest that with appropriate planning and policies the objective of self-sufficiency in cereals is not an impossibility, in the case of Syria, as the country is endowed with substantial cultivable land areas (not all of which can be brought under cul- tivation by the end of the century) that have not been developed sufficiently. Agroindustries 8.68 Special emphasis is being placed on agroindustries that utilize domestic raw materials for the purpose of import substitution and export expansion. As examples, the sugar industry and the textile industry hold a prominent place in the Fourth Five Year Plan for agriculture. The sugar industry and the textile industry are specifically analyzed in the relevant Industry chapters of this report. The purpose of this section is to look further into these industries, especially from the point of view of the utilization of agricultural raw materials. 1/ Note: Barley is not a significant irrigated crop. Only 14 thousand hectares were under barley in 1975. 239 Cotton and Textiles 8.69 Cotton is one of the predominant crops in Syria, by any number of criteria. With roughly 200,000 hectares under cultivation, it occupies only 4 percent of the cultivated area, but 44 percent (180,000 hectares) of the total irrigated lands of the country. Syrian cotton is of high quality; 90 percent of ginned cotton is grade zero/extra or zero. Cotton cultivation has been one of the most dynamic segments of Syrian agriculture. This has been ref:Lected in dramatic increases in yields that made it possible for one-third of irri- gated land to be withdrawn from cotton production since 1962-63 without appre- ciable decrease in total output. Increased yields of the magnitude experienced in the past are not expected to continue in the future (see Chapter 7). This places a limit on the possibilities of increasing irrigated lands for other crops by withdrawing from cotton. As an example, the provision of the Fourth Five Year Plan that 40,000 hectares are to be switched by 1980, mainly from cotton, to sugarbeet with cotton output remaining constant at the 1975 level of 400,000 tons is unrealistic. It is estimated that such a switch will result, at a minimum, in a decrease in cotton production to 368,000 metric tons, an 8 percent decrease from the 1975 level. 8.70 Cotton is also a predominant crop in providing employment and as a source of foreign exchange earnings. It is estimated that 90,000 families, or about half a million peasants, are involved in the production of cotton, and that more labor is employed in ginning and manufacturing (see Chapter 9). Cotton exports in 1972 were valued at about $100 million, contributing the largest share, 34 percent, of total Syrian exports. This total further increased to $112 million in 1975 (and as much as $183 million in the peak- price year of 1974) but due to the increase in oil exports its share dropped to second place with 12.8 percent in 1975. Furthermore, textile exports contributed another $22 million in 1975, being the most important commodity group in the export of manufactured goods with 32 percent of the total. 8.71 The successive Syrian Five Year Plans have consistently emphasized export promotion and import replacement to achieve greater self-suffiLciency in consumer and intermediate goods industries. Accordingly, expansion of the textile industry received special attention in the Third Plan and also in the Fourth. During the Third Five Year Plan the output of cotton yarn inlcreased from 20,000 tons in 1970 to 32,000 tons in 1975, which, however, was short of the target of 48,000 tons. The Fourth Plan is even more ambitious, as Table 8.5 illustrates. 8.72 The strategy of the Fourth Five Year Plan is centered on increasing yarn production, both for the domestic market and for export (see Table 8.6). To achieve that, exports of ginned cotton will decrease by 1980 by mLore than 50 percent of their 1975 levels. Yarn production, on the other handi, will increase by 160 percent, while exports of yarn will grow from 12,400 tons in 1975 to 74,200 tons in 1980, increasing sixfold. Since the production of yarn takes place almost exclusively in the public sector, the increase in yarn exports will come by expanding public sector fabric production, For this purpose 13 percent of the total investment in public manufacturing in 240 _ the Fourth Five Year Plan will go to the textile sector (which thus ranks third after chemicals and cement in proposed investment outlays). A massive expansion of spinning capacity is planned, from 285,000 spindles in 1975 to 735,000 spindles in 1980. The proposed expansion of spinning capacity aims at processing 75 percent of the expected cotton output into yarn by 1980, as compared to only 25 percent in 1975. Table 8.6: COTTON AND COTTON YARN, SELECTED DATA, SYRIA, 1975 AND TARGETS FOR 1980 Area Yield Production Seed Cotton (hectares) (tons per hectare) (tons) 1975 208,000 2.0 414,000 1980-Fourth Plan Target 160,000 2.5 400,000 1980-World Bank Estimate 160,000 2.3 368,000 For Domestic Processing For Exports Total Raw Cotton (Ginned) (ton) (ton) (Ton) 1975 33,000 102,000 135,000 1980-Fourth Plan Target 116,000 48,000 164,000 For Domestic Market For Exports Total Yarn (ton) (ton) (ton) 1975 30,000 12,400 43,000 1980-Fourth Plan Target 40,000 74,200 114,200 Source: State Planning Commission. 8.73 The following observations are appropriate in connection with the approach to cotton and the textile industry: (i) There are severe reservations as to whether it is feasible to increase production of yarn to 114,000 tons by 1980. These are outlined in Volume 3, Annex 2. (ii) Given a 3 percent annual increase in population (total of 8.6 million by 1980) and assuming an equal increase in purchasing power, an increase in domestic demand for yarn from 30,600 tons in 1975 to 40,000 tons in 1980 seems realistic. -241 - (iii) It is feasible to increase exports of yarn, accepting the constraint of total yarn output. The strategy for that is outlined in Volume 3, Annex 2, where it appears that the main Syrian customers will be the known markets, including the neighboring Arab countries, the Eastern European countries with which Syria enjoys clearing agreements and the Common Market countries-to which Syria has preferential access. (iv) Exports of yarn are not competing with exports of raw cotton. Given the real constraint that exists in increasing the produc- tion of yarn, the optimum policy would be not to neglect the known markets for the export of raw cotton. (v) In fact, even if domestic processing of yarn could expand to the levels anticipated in the Plan, the decrease in ginned cotton exports from 102,000 to 48,000 tons is unwise. We would recommend that cotton acreage not be shifted to sugarbeet and that cotton production expand, or at least not decline, over the 1975 levels. This recommendation is based on the analysis of the relative profitability of cotton and sugarbeet t:hat follows. Sugarbeet and the Sugar Industry 8.74 Syria has been relying on imports to meet the demand for sugar, with a significant burden on the balance of payments as a result. The small sugarbeet output that has existed up to now is processed in three sugar mills: (i) A mill operates at Homs with the capacity to process 1,200 tons of-beets per day for 100 days (total 120,000 tons) and operating with total beet requirement of 100,000 tons. (ii) A mill at Damascus with capacity of 500 tons for 100 days and operating with total beet requirement of 22,500 (50 daiys at 450 tons a day). (iii) A mill at Ghab with capacity 2,000 tons for 100 days and operating with total beet requirement of 60,000 (50 days at 1,200 tons a day). Total refined sugar output is equal to 22,800 tons (182,500 x 12.5% sugar content). 8.75 The ration-supplied quantity of sugar at 1.5 kilogram month per capita for a population of 7.4 million amounts to 133,000 tons. Actual con- sumption of sugar is evidently greater than the ration-supplied quantity; it was 156,000 metric tons in 1965 and it is estimated at 160,000 metric tons for 1976. The excess of domestic requirements over domestic production are sup- plied by imports of raw sugar. However, as- the table below indicates, the imports of raw sugar vary greatly from year to year, suggesting that: there may be a certain elasticity in consumption demand. Imports of raw sugar have been as follows: - 242 - Year Quantity (Tons) Price (Per kg) 1974 63,000 SL 1.63 ($0.42) 1975 128,000 2.90 ($0.74) 1976 (est.) 140,000 1.27 ($0.33) 8.76 Raw sugar is refined at local mills, and its conversion ratio to refined sugar is 96 to 97 percent. By refining raw sugar the local mills remain in operation during the off-season period for another 200 days a year. Total utilization of existing mill capacity is, as a result, 250 to 300 days a year. Correspondingly, labor employment at the existing mills is also pro- vided roughly on a year-round basis. (The Homs factory, for example, employs 240 workers for 300 days and an additional 120 workers during the 100-day peak season). 8.77 There is at present (1977) a commitment to import another four sugar mills with a processing capacity of 4,000 tons of beets per day each for a season of 100 to 120 days. The four mills are to be located as follows: (i) a Belgian mill in Mesken; (ii) another Belgian mill in Raqqa; (iii) a Czechoslovakian mill in Deir-ez-Zor; (iv) an Italian mill in Ghab which will serve the Homs and Ghab area. The import cost of each mill is about $50 million. 8.78 The total of seven sugar mills that are planned to be in operation by 1980 will require a sugarbeet crop of 2 million tons. This represents an increase of 1.8 million tons over the current sugarbeet production of 200,000 tons, and at yields of 30 tons per hectare, it will amount to an additional 60,000 hectares of irrigated land being cultivated with sugarbeet. The Fourth Plan provides that 40,000 hectares will be shifted, mainly from cotton, to sugarbeet cultivation while the remaining 20,000 hectares will come from newly irrigated lands. Economic Analysis of Sugarbeet Relative to Cotton 8.79 Since sugarbeet and cotton production compete in the most direct sense, the evaluation of the plans for either agroindustry must involve production analysis for the two crops. The private profitability of cotton and sugarbeet is estimated as: Cotton Sugarbeet Cost of Production per hectare SL 2940 SL 3340 Yield per Hectare in kilograms 2350 30,000 Cost per kilogram SL 1.25 SL 0.11 Sales Price per kilogram SL 1.45-1.70 SL 0.13-0.145 Gross Revenues per hectare I 3407 3340 Gross Revenues per hectare II 3995 4350 Total Cost per hectare 2940 2940 3340 3340 Net Revenue 467 1055 560 1010 Rate of Return 15.9% 35.9% 16.8% 30.2% - 243 - 8.80 In the above calculations the costs of production per hectare are the "hypothetical average costs of production" for the 1976/77 season, esti- mated by the Ministry of Agriculture. They include operating costs, material inputs costs, rent of land and interest on capital - but no profit. The producers' prices per kilogram are officially fixed and range for cotton between SLl1.70 for first grade to a low of SL 1.45 and for sugarbeet from SL 0.145 for the summer crop (harvested-in August-September) to SL 0.13 for the winter crop (harvested in June-July). 8.81 The above data reveal that the private rates of return for both crops are very close, slightly favoring sugarbeet in the lower price ranges while favoring cotton in the higher ranges. The rate of return of sugarbeet, however, is most likely overestimated. Sugarbeet must be processed soon after harvest, otherwise its sugar content decreases radically. In countries with cooler climate and refrigeration facilities, processing can be postponed for as long as 30 days after harvest, while in Syria this time is reduced to three days. It is planned that the farmers adhere to a rigid schedule. They will be provided with coupons that entitle them to bring to the mill each day during the season a specified quantity of beets for processing. If they do not keep up with the schedule, they will bear the cost of the reduction in sugar content--a provision that the General Union of the Peasants has vigor- ously protested. Be this as it may, the rigid schedule to which the farmer is subjected and the cost, in case he is unable to adhere to it (whether for his fault, transportation bottlenecks or factory down-time, have as effect the decrease in the private rate of return to sugarbeet compared to cotton. 8.82 The conclusion of the comparison of the private profitabilities of the two crops is that, at first sight, current costs and returns are roughly consistent with the Plan's aim of increasing sugarbeet production relative to cotton. Further examination, however, reveals significant indirect costs of sugarbeet, such as adhering to a rigid schedule of production and delivery, that the farmers will consider seriously before they expand their acreage. Under the circumstances it appears very doubtful that the level of :incentives provided will be adequate for reaching the targets of the Fourth Five Year Plan. 8.83 Aside from calculations of the respective private profitabilities, the social profitability of the two crops must also be considered. Sugar is currently an import commodity. Cotton is the main Syrian export commodity, which, moreover, seems to be facing an elastic demand in the international market, while domestic demand is also increasing. This is evidenced by the fact that no cotton stocks have been accumulated in recent years. Social profitability calculations, therefore, should also include import and export considerations. The relative calculations appear in Table 8.7. 8.84 Three alternatives are compared in the table. The two refer to sugar output of 160,000 metric tons that adequately covers the current levels of sugar consumption. Moreover, if the ration-priced sugar at SL 0.85 per kilogram (as compared to the free market price of SL 3.00 per kilogram) becomes in the future selectively available only to the low-income families, _ 244 - total consumption levels will probably decrease below 160,000 metric tons. The third alternative refers to the Plan's sugar production of 250,000 metric tons by 1980. Therefore, it assumes that the three existing and the four planned sugar factories will be in operation. In comparison Alternative I is based on the existing capacity and imports of raw sugar while Alternative II is a combination of I and III in relying on existing capacity, two new mills and imports of raw sugar. 8.85 The direct costs of meeting target sugar production are estimated on the basis of two import prices of raw sugar: The current cif price of $0.33 per kilogram and the historically high price of the 1975 Syrian imports of $0.74 per kilogram. Alternative III leaves a residual of at least 70,000 metric tons of sugar for export. Given the current world demand and supply situation, it is questionable whether Syria will be able to actually export that quantity. For the purposes of the calculation, however, we have optimis- tically assumed that exports will be feasible at the current world price of $0.25 per kilogram. - 245 - Table 8.7: ALTERNATIVES FOR REACHING SELECTED SUGAR PRODUCTION TARGETS I. Sugar Production: 160,000) mt Technology: Existing Mill Capacity and Imports of Raw Sugar Processed suqarbeet output produce on 6,700 has 200,000 mt Sugar equivalent 25,000 mt Sugar from imports 135,000 mt Raw sugar import equivalent (96%) 140,000 mt Total cost of raw sugar imports: (i) at current import prices $0.33 kg $46,200,000 (ii) at high price of $0.75 kg $103,600,000 II. Sugar Production: 160,000 mt Technology: Existing Mill Capacity, Two New Factories and Imports of Raw Sugar Processed sugarbeet-output produced on 36,700 has 1,100,000 mt Sugar equivalent 137,500 mt Sugar from imports 22,500 mt Raw sugar equivalent (96%) 23,400 mt Total cost of raw sugar imports: (i) at current import prices $0.33 kg $7,722,000 (ii) at high prices of $0.74 kg $17,316,000 Total opportunity cost of cotton on 30,000 has of irrigated land: (i) 75,000 mt (yields 2,500 kg/ha) $52,500,000 Exported at current price of $0.70 kg (ii) 75,000 mt (yields 2,500 kg/ha) $15,000,000 Exported at low price of $0.20 kg III. Sugar Production Technology: Existing Mill Capacity and Four New Factories Processed sugarbeet output produced on 66,700 has 2,000,000 mt Sugar equivalent 250,000 mt Sugar from imports none (Sugar exports 70,000 mt) Total opportunity cost of cotton on 60,000 has of irrigated land (i) 150,000 mt (yields 2,500 kg/ha) Exported at current price of $0.70 kg $105,000,000 (ii) 150,000 mt (yields 2,500 kg/ha) Exported at low price of 0.20 kg $30,000,000 Total Cost of Alternatives Compared: I II III (i) At current prices -$46,200,000 60,222,000 105,000,000 (ii) At extremes of unfavorable prices $103,600,000 32,316,000 30,000,000 (iii) Sugar exports at current export $ -17,500,000 prices of $0.25/kg Source: World Bank estimates. 246 8.86 The indirect costs of sugar production are the export proceeds of cotton. They have been estimated by using the current world price of $0.70 per kilogram and the alternative low price of $0.20 per kilogram that appears highly unlikely for the Syrian quality of cotton. 8.87 These alternatives are summarized at the bottom of the table. At current prices, the utilization of existing capacity with imports of raw sugar is clearly the dominant strategy. On the extreme assumption of most unfavor- able prices for Syria, both for raw sugar imports and cotton exports, and the optimistic assumption of Syrian exports of sugar (at current world prices) Alternative III becomes slightly better than Alternative II. 8.88 There is merit in buying self-sufficiency to a certain extent and insulating the country from the vagaries of wild fluctuations in world market prices for some vital commodities. Under these considerations Alternative II with only two new sugar mills in operation is probably the optimum combination of forgoing relatively small current revenues (loss of $14,000,000 compared to Alternative I) in order to buy substantial insurance against adverse price changes in the future (gain of $70,000,000 compared to Alternative I). Al- ternative III should be discarded since it can only buy additional insurance against adverse price moves at exorbitant cost compared to the other alterna- tives. 8.89 Some additional qualitative considerations that have not been included in our estimates further strengthen the choice of Alternative II: (i) The capital cost of the new factories has not been considered. Alterna- tive II saves $100 million in foreign exchange or, in case the purchase of the two new factories cannot be cancelled, it saves the portion of that amount which can be recouped by reselling the factories or even scrapping them. It also saves the installation and operation costs of the two factories in local currency. (ii) Alternative III would result in complete idleness of all seven factories over nine months of the year. This underutilization represents wasteful use of scarce capital. Alternative I, and to a certain extent also Alternative II, would stretch the utilization of capital over the year by processing imported raw sugar. An additional benefit of these alternatives is that severe cyclical unemployment of labor is avoided. (iii) The direct com- parison of the cost of production of sugarbeet and cotton has not accounted for the fact that the former has higher water requirements than the latter. Water being the especially scarce resource in Syria, the alternative that favors cotton production should be preferred. (iv) The exact timing that production and processing of sugarbeet requires would place further demands on the Syrian transportation network and will necessitate further additions to expansive capital in terms of trucks, and eventually refrigerator facilities. CONCLUSIONS AND RECOMMENDATIONS 8.90 Agriculture has been a laggard sector in Syrian economic development and its growth in the recent past has not kept up with the rate of population growth. The high rates of growth in GDP achieved since 1970 were narrowly based on a few industries (mainly oil) and as a result, the basic structural transformation necessary for sustained economic growth has not been achieved. - 247 - Rapid rates of growth in the agricultural sector, approaching or even exceed- ing the overall rates of growth in GDP, would be necessary in order to restore a sectoral balance in the economy. While such rates of growth are feasible in Syrian agriculture, the sector is now severely constrained by economic policies, allocation of resources and institutional factors. The recommenda- tions that follow focus on these constraints. Agricultural Planning 8.91 There is an ambivalence in Syria about the direction of agricultural planning. Law Number 14 of 1975 and the Annual Agricultural Production Plan 1976/77 move in the direction of more centralized and compiehensive planning. On the other hand, the ratification of the Fourth Five Year Plan with a limited scope and on an interim basis, together with official pronouncements would promote participation of the private sector and channeling of private capital into agriculture. Ambivalence causes indecision, which contributes to adopting policy measures spasmodically and to making decisions by defaualt. In this way it forecloses permanently alternative options of development that would otherwise have been feasible. 8.92 Should the decision be to move towards centralized and comprehensive planning, the logical conclusion would be to organize agriculture around state farms and agricultural cooperatives. In this event a concerted and urgent effort should be made to reorganize these institutions, as their performance to date does not allow them to become the foundation for the major effort needed for agricultural development. 8.93 Should the decision be to move the other way, the foundation is already there in the form of a vigorous sector of private farming that: makes up about 80 percent of Syrian agriculture. Within the context of pragmatic socialism, the private sector should be regulated but should be freed from the shackles of futile and unnecessary bureaucratic control. 8.94 The "crop rotation and intensification scheme" produced to implement Law Number 14 is an example of such a futile attempt for control. As a policy instrument to implement the Plan it cannot be enforced, and if it were to be enforced it would be more likely to lead to the decrease, rather than increase, of production because it subjects the farmers to severe diseconomies by forcing them to forgo specialization in favor of achieving an arbitrary and rigid crop mix on their land. 8.95 The fundamental stumbling block for agricultural planning in Syria is the lack of data. There has not been a complete agricultural census nor have there been any major farm management studies. The rate of return on investment in such data collection will be high. Together with the land classification survey, which must be speeded up, they will provide the back- bone for effective agricultural planning. 8.96 The institutions for data collection and for agricultural planning must be strengthened. The competent mechanism that the Central Bureau of Statistics has built for data collection must be complemented in order to _ 248 _ handle the agricultural sector by creating efficient data collection and processing units at the Ministry of Agriculture and at the regional Director- ates of Agriculture. Furthermore, the students of agriculture at such Univer- sities as Aleppo will receive valuable agricultural experience, along with providing an important service, if they are used for conducting surveys,and for collecting data at the farm level. Resources for Agriculture 8.97 At the beginning of the 1970s, agriculture was absorbing as much as 27 percent of fixed capital formation--a share which had declined to 13 per- cent by 1975. Yet this figure is misleading since the major share of gross capital formation has gone into the Euphrates project. To the extent that the building of the Dam fixed the pattern of public investment in the agricul- tural sector it had the unfortunate effect of foreclosing alternative develop- ment options. The choice of agricultural strategies has been limited by the need to reap the full agricultural benefits of the original investment in the Euphrates Dam and by the need to invest heavily in drainage works. As a result, technical problems (such as plant hygiene, land surveying, and crop improvement), institutional problems (land fragmentation, extension services), policy aspects (administered prices and other investment priorities) and structural problems (the relation of agriculture to the rest of the economy, projected demand for agricultural commodities and its relation to policies of self-sufficiency) were largely overlooked. These problems must now receive priority attention. 8.98 The cost of bringing new lands into cultivation is higher than expected and their agricultural potential is lower than anticipated--an experience not inconsistent with parallel situations in other countries, notably Egypt. Plans for bringing 135,000 hectares under irrigation in the Euphrates Basin by 1980 are unrealistic; between 40,000 and 60,000 is a more likely estimate. In the meantime, it is not premature to shift empha- sis from expanding agriculture at the extensive margin and to work at the intensive margin instead. This would require focusing on technical, institu- tional, policy and structural problems that have been neglected. 8.99 As the emphasis is being shifted away from large scale irrigation schemes in the Euphrates valley or basin, high payoffs may come from smaller projects for construction of catchment reservoirs, for rehabilitating low-lift pump schemes and for exploiting ground-water potential, especially in areas with precipitation above 350 millimeters. 8.100 Fertilizer application is now limited to a few crops (mostly cotton). However there is substantial potential for increasing yields through fertilizer application in areas with mean annual rainfall of more than 500 millimeters. Modest fertilizer dosages would also be profitable in the areas with rainfall of 350-500 millimeters. 8.101 Fertilizer distribution has been hampered by the constraints facing the Agricultural Cooperative Bank, the sole distributor. Similarly, credit - 249 - allocation has suffered both because it is tied to the adoption of the crop- rotation scheme and because of the limitations of the Agricultural Cooperative Bank. The institutions that serve agriculture, and the Agricultural Coopera- tive Bank in particular, need to be reorganized and revitalized. 8.102 There is evidence that a shortage of labor may be appearing in Syrian agriculture. This will have an important impact on decisions concern- ing the crop mix and intensification, mechanization, and organization of agriculture in general. Yet there is no information on labor as a factor of production and on the agricultural household as a production unit. This is among the most severe gaps in the data resources necessary for plannilng agri- cultural development in Syria. 8.103 Crop rotation patterns must be studied in detail by considering both agronomic and economic criteria. As examples, the chief limitation on the cereal-fodder rotation scheme is probably the cost of transportation of the fodder; a wheat-wheat sequence may still be more profitable than the wheat- lentils rotation, despite the lower wheat yields in the former. Similarly, the potential of developing clean fallow, as compared to the alternative of weed cover, and the integration of the livestock and the crop system, are examples of policy decisions that cannot be made without considering economic criteria, especially scarcity prices, together with the agronomic factors. 8.104 Despite the public fixed capital formation that went into agricul- ture, there are reasons to believe that on balance resources have flowed out of agriculture over the fifteen years 1960-1975. The major instrumenit for what is equivalent to a hidden tax on the agricultural sector is the operation of the price system. Agriculture will continue to be a serious limiting factor in Syrian economic development unless this flow is reversed and net resources, both private and public, on balance go into the sector. Institutional Factors and Policies 8.105 The pricing mechanism in Syria is rather complicated and in agricul- ture in particular it appears to have provided disincentives more often than incentives. Yet on occasions when prices did not become constraining factors, as for example in perishables and poultry, significant increases in output were obtained in relatively short periods. The pricing system needs to be rationalized, especially if the private sector is to play a more important role in agricultural development. 8.106 The attempt in the past to deemphasize the role of prices as an allocative and distributional mechanism has led to results not alwa'rs consis- tent with developmental goals. Examples are the border trade, the regional distribution of certain production activities or the commodity substitution in production. 8.107 A specific case of commodity substitution that must be reexamined by considering economic factors and world prices is the expansion of sugar- beet at the expense of cotton production. World prices of both commodities have fluctuated widely in recent years, but at 1977 price levels (and also - 250 - within a realistic range of expected future world prices) cotton seems to dominate as an export commodity and the advantages of substituting domestic sugar for imports rapidly vanish. 8.108 The planned expansion of sugarmilling capacity by the addition of four new factories should be reevaluated in the light of current and expected levels of prices. If possible, two of the four planned new factories should be cancelled. If not possible, serious efforts should be made to procure elsewhere the sugarbeet for their operation, especially since at current prices private farmers' profitability favors cotton as opposed to sugarbeet. In any event, it will not be feasible for the three existing factories and all four new ones to operate at full capacity for the 100-day season and if they do, the quantity of sugar produced will exceed the local demand with unclear prospects for exports. Another social cost of the addition of the four sugar factories is that the off-season idleness of all sugar mills will be nine months of the year, while currently the existing mills operate nearly on a year-round schedule by refining imported raw sugar during the off season. 8.109 The role and functions of public institutions, such as general orga- nizations, state farms and cooperatives, should be coordinated with the role of the private sector in the areas of production and marketing. An efficient public sector of production could provide "model units" that would be refer- ence points for regulating prices for the private sector. Public farms and cooperatives, however, will have to be reorganized in order to discharge this function. Similarly, institutions in the public agricultural sector, such as the General Organization for Cows, should also assume important research and extension functions to service both the public and the private sector. 8.110 In marketing similarly, the private sector should complement the activities of the public marketing boards. The marketing of perishables would become an expensive endeavor if it were entrusted to the public sector. A solution in between what currently exists and the proposed creation of a general organization for the marketing of meats and vegetables would be to organize effective private grower organizations to undertake that marketing function. 8.111 The Agricultural Cooperative Bank is now primarily responsible for the distribution of operating inputs for agricultural production. The Bank must be strengthened in order to perform that function effectively and it should also be complemented by private organizations in this task. An objec- tive in the reorganization of the Agricultural Cooperative Bank should be to lighten the burden it now carries. There is no reason, for example, for it to have the monopoly on the distribution of fertilizers, and there is no need to have the Bank license the crop mix of the farmers, because no such license is necessary. 8.112 A decision has to be made as to the agency that will be responsible for the distribution of the services of fixed inputs, especially mechanical equipment. It would be natural to strengthen the cooperatives for this role and either to create the basis of an expanded form of communal tillage or to provide tillage services on a rental basis. This would necessitate reorga- nization of the cooperative structure that has been faltering. Here also the private sector machine shops, which are ubiquitous in virtually every town in Syria, should be used to complement the public sector activities. - 251 - CHAPTER 9 INDUSTRIAL ORGANIZATION AND PERFORMANCE 1/ 9.01 The manufacturing sector in Syria before 1950 was comjDsed mainly of small workshops; modern, relatively large scale plants were few--severa.l tex- tile mills, a cement plant and a sugar mill. The 1950s witnessed the growth of modern industry in the spinning and weaving of cotton and in the production of cement, vegetable oils, sugar, soaps, matches and glass. However, except for textiles and cement, modern manufacturing industry was carried on only on a modest scale throughout the 1950s. The contribution of the government to Syria's manufacturing development during this phase of industrialization was confined essentially to encouraging private initiative by providing bank credit guarantees and protection from import competition. 2/ 9.02 The absence of adequate and reliable early time series makes it dif- ficult to assess the growth of manufacturing output in the 1950s (see Chapter 3). One international index of industrial production estimated that t'he out- put of principal manufacturing industries in Syria increased at an average annual rate of nearly 10 percent between 1956 and 1960. 3/ By 1960 the share of manufacturing value added in gross domestic product (GDP) at current factor cost is estimated to have been about 16 percent (from Table 9.1) and manufac- turing is thought to have absorbed nearly 12 percent of the labor force (Table 9.2). Of the other activities usually included under the heading of industry, public utilities contributed 0.9 percent and construction 4.2 percent of 1960 GDP. 4/ Mineral extraction (mining and quarrying) generated only negligible value added, being confined to rock salt until petroleum extraction began in the late 1960s. ' This chapter draws upon the work of Mr. Javad Khalilzadeh-Shirazi. 1/ Except for certain indicators clearly stated to be for all industrial activity, this chapter and Chapter 10 cover only manufacturing industry. 2/ Beginning in 1949, the government acted as guarantor of medium-term and long-term commercial bank loans to manufacturing joint-stock companies. The loans ranged in maturity from five to ten years and carried an interest rate of 3 percent a year. An industrial bank was established in 1958 to cater to the need for industrial finance. 3/ United Nations, Industrial Development in the Arab Countries (New York 66II.B.23, 1967) p.132. 4/ Syrian officiai statistics do not include construction under industry. In this report it has been included in total industry where not otherwise stated. - 252 - Table 9.1: ORIGIN OF GROSS DOMESTIC PRODUCT AT CURRENT FACTOR COST FOR SELECTED YEARS BY SECTOR OF ECONOMIC ACTIVITY, 1960-75 Sector of (Millions of Syrian pounds)/ Percent of Total Economic Activity 1960 1965 1970 1975 1960 1965 1970 1975 Agriculture 652.0 1,517.0 1,344.3 3,485.3 24.5 34.8 22.8 18.5 Industry Mineral extrac- tion /b 2.0 3.0 130.0 3,223.0 - - 2.0 17.1 Manufacturing 425.0 699.0 910.3 2,449.0 15.9 16.0 15.4 13.0 Construction /c 112.0 101.0 184.1 1,096.5 4.2 2.3 3.1 5.8 Electricity, gas and water 24.0 49.0 85.0 128.0 0.9 1.1 1.5 0.7 Subtotal, industry 563.0 852.0 1,309.4 6,896.5 21.1 19.5 22.2 36.6 Trade, transport and services 1,448.0 1,991.0 3,246.4 8,473.9 54.4 45.7 55.0 44.9 Total gross domestic product at current factor cost 2,663.0 4,360.0 5,900.1 18,855.7 100.0 100.0 100.0 100.0 /a For the dollar value of the Syrian pound, see Table SA 3E.2. /b Mining (petroleum, phosphates, ...) and quarrying. /c In official Syrian statistics, construction is not included in industry. Source: See Table SA 2B.2 and the Note on the National Accounts Statistics in Volume 4. - 253 - Table 9.2: LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT, TOTAL AND IN MANUFACTURING, SYRIA, SELECTED YEARS 1960-1975 /a (Thousands of People) Category 1960/a 1961/b 1965/b 1970/a 1971/b 1975/b Total Labor Force 1,056.8 1,186.0 1,367.5 1,570.8 1,645.7 1,839.0 Employment - 1,091.0 1,263.5 1,472.5 1,522.3 1,750.5 Unemployment _c - 95.0 104.0 98.3 123.4 88.5 Manufacturing Labor force 124.8 136.0 153.0 190.3 181.9 210.7 Employment - 128.0 144.0 183.7 172.3 205.8 Unemployment |c - 8.0 9.0 6.6 9.3 4.9 /a Data for 1960 and 1970 are from the census. /b Data for 1961, 1965, 1971 and 1975, are from sample surveys and may not be fully comparable to census data. /c Data on registered unemployed are very incomplete because of the rule requiring a worker to have lived in a province (mohafaza) for five years before being allowed to register at a Ministry of Labor employment office. This means that unemployment figures seriously understate the situation in areas of high migration inflow (Chapter 6, Regional and Urban Development). Sources: Adapted from Central Bureau of Statistics, Statistical Abstracts of Syria 1962, 1966, 1976, see also Table SA 1A.4. THE EMERGENCE OF PUBLIC MANUFACTURING ENTERPRISES 9.03 Syria's modern manufacturing industry was subjected to a series of far-reaching institutional changes in the early and mid-1960s. First:, when nationalization measures were taken in Egypt in 1961, Syria's large private businesses were also nationalized--only to be denationalized a few months later after the dissolution of the United Arab Republic (UAR, 1958-6L). In 1964 and 1965, however, along with the nationalization measures adopted in several other sectors, more than 100 large and medium scale manufacturing enterprises--virtually encompassing the entire modern segment of industry-- were brought under state ownership and control. There followed an exodus of managerial and technical skill as well as private capital from the country --a drain from which Syria suffered particularly in the remaining years of the 1960s. 9.04 The nationalized enterprises were-first put under the umbrella of a newly-formed General Organization of the Public Industrial Sector, which in 1968 was replaced by three "Unions" for food processing; textiles; and engineering and chemicals. As part of the reorganization designed t:o improve managerial control and to enhance efficiency, mergers were also introduced, transforming some 108 firms into 47. 9.05 In a third major reorganization of public manufacturing enterprises undertaken in 1975 to achieve more efficient management, the Unions were replaced by six General Organizations covering food processing; sugar; tex- tiles; cement; chemicals; and engineering, The General Organizations are attached to the Ministry of Industry and operate 52 public enterprises, some of which have more than one plant. 1/ In 1975 public enterprises were thought to account for about 43 percent of the manufacturing sector's gross production (Table SA 8A.8), 31 percent of its employment, and more than 90 percent of its capital investment (Table SA 8A.9). THE PRIVATE MANUFACTURING SECTOR 9.06 Since the nationalizations of 1964 and 1965, which reflected a shift toward socialism, the scope for private investment in modern manufacturing activity has been limited. Private manufacturing comprises mainly small work- shops engaged in activities of the artisan or handicraft type. In 1975 there were more than 33,000 private establishments classified as being engaged in manufacturing; nearly half were sole proprietorships. Their size distribu- tion at the end of 1975 (excluding the more than 15,000 establishments with only one worker) was as follows: Number of Private Manufacturing Size (Workers per Establishments Establishment) 767 10 or more 1,308 6 through 9 18,328 2 through 5 The larger private units are found primarily in textile weaving (specialty fabrics), hosiery (knitwear), certain food-processing lines, and fabrication of small household appliances. In some specialty fabrics and knitwear, pro- duction by private firms exceeds that of public enterprises (Table SA 8A.6). Statistical coverage of private manufacturing activity is seriously deficient. Except for a survey of economic activity in 1970, the results of which had not yet been fully tabulated and published in 1977, no comprehensive indus- trial census has been carried out in Syria. Hence data on output, value added and employment in the sector as a whole and on the relative importance of public and private manufacturing should be treated with considerable caution. For the private sector, possibly only investment data are rela- tively reliable, as there is an investment licensing requirement. Even license applications may understate private investment for fear of exposure, 1/ Cereal and flour mills, tobacco-processing factories and cotton gins are administered under the supervision of various other ministries. For more details on the General Organizations, see Chapter 2 (Public Administra- tion) and Volume 3, Annex 3. - 255 - among other considerations. The detailed analysis in this report therefore focuses on the public sector, for which more reliable data are available. GOVERNMENT INCENTIVES TO INDUSTRY 9.07 Since the nationalization measures of the 1960s and the emphasis on socialism, the role of private investment,in general and investment in the industrial sector in particular has been sharply curtailed. The government's reliance on central planning and direct controls has diluted, if not elim- inated, the significance of the country's macro-incentive framework in deter- mining the amount and direction of investment in industry. 1/ The primary devices for resource allocation in the public manufacturing sector have been the five-year plans and the annual plans. Resource allocation through central planning need not be responsive to the factors subsumed under the rubric of the macro-incentive system, and does not appear to be so in the Syrian case. The incentive framework is nevertheless described in the following sect:ions because of its influence on private manufacturing activity and also as an aid in understanding the broader economic environment within which public taanufac- turing enterprises operate. The Protection System 9.08 Syria's protection policy over the three decades from 1946 to 1976 has been shaped by its desire to stimulate domestic development by minimizing import competition. At the time of the nationalizations in 1965 foreign trade became a monopoly of the state, giving the government strict control over imports and exports. Since nationalization, direct control (prohibitions and quotas) on imports has been the primary instrument of industrial protection. Indirect control through import tariffs has been used only to a minor extent for protection, but primarily to generate revenue and, to some extent, to reduce costs on inputs for industry (through generally low duties on capital equipment and on raw or intermediate materials for industry that are not pro- duced domestically). 9.09 Syria's tariff system consists of a basic rate, usually ad v.alorem (on value rather than weight) and of a number of surcharges, usually earmarked for a specific purpose. The basic import duty on raw materials and capital goods is one percent of the cif price (including cost, insurance and freight) --see Volume 3, Annex 1, Table A1.2.3. For the preponderance of semiprocessed manufactures, the basic duty rate is also one percent, although for some items the rates range between 7 and 15 percent. In exceptional cases (such as rubber soles) the rate is as high as 45 percent. Some degree of escalation according to the stage of processing is discernible in the tariff structure. Duty exemptions are granted for certain items deemed essential for either consumption or production (for example, basic foodstuffs and fertilizers). 1/ The macro-incentive framework consists principally of protection against imports; taxes; subsidies; price control; and the control and allocation of foreign exchange. - 256 - 9.10 The basic duty rates on finished manufactures vary widely, usually depending on whether the item in question is considered a necessity or a luxury, the range being between one percent and well over 100 percent (up to 300 percent on the costliest private passenger cars). Imports not exempt from the basic customs duty are subject to a number of additional surcharges, as follows: Basis of Surcharge Applied to Rate Valuation Consumption Imports exempt from basic duty 1 percent of cif value tax (goes or subject to 1 percent basic to municipal- duty ities) other imports 4 percent of cif value Statistical all imports except those under 4 percent of cif value tax Arab Common Market agreements Defense tax all imports subject to the 15 percent of basic customs basic duty duty Education tax all imports 2 percent of basic duty 10 percent of plus the con- sumption tax Port tax all goods entering the coun- 3 percent of basic customs try via Syrian ports, except duty transit goods Sea transport all goods entering or leaving 0.2 percent of cif price tax Syria by sea 9.11 Inasmuch as quantitative controls (quotas and total prohibitions) are the primary instruments of protection, and domestically produced manufac- tures are subject to price control, the basic listed customs duty plus the various surcharges do not constitute the true "effective" rate of protection, but may be regarded as the "nominal" rate. As is clear from the above schedule, the import surcharges substantially increase the nominal tariff rates on imports. After the addition of all the surcharges, the nominal rate on an item subject to the basic duty rate of 1 percent, for example, becomes 6.6 percent. Hence, except for imports exempt from the basic duty, the minimum nominal tariff rate is usually 6.5 percent of the cif value. 9.12 Unfortunately, no data are available on effective rates of protec- tion for Syria's manufacturing industries. For the reasons mentioned above, nominal rates provide little guidance concerning the probable pattern of effec- tive protection. In certain instances, however, the nominal tariff rates are used in conjunction with cif prices as benchmarks for fixing domestic prices on such items as television sets and cement (see Price Control, this chapter). - 257 - The domestic price in such cases is set so as to equal the price of imports inclusive of the tariff, although in reality very few imports, or none at all, may actually be permitted. In the case of manufactures with low value added content, the application of this procedure could yield exceptionally high levels of effective protection. However, the resource-pull effect of such high protectioi± should not be exaggerated, as investment decisions, at least in the public sector, are not usually influenced by considerations of profit. A systematic evaluation of the pattern of effective protection and domestic resource cost of Syrian industry would be desirable primarily as a guide for future public investment. Moreover, effective protection will have signif- icant resource-pull impact in future as greater scope is afforded for pri- vate investment in industry (see Regulation of Private Investment, belcow). To prevent misallocation of resources, protection policy will need to be tailored so as to provide equal effective rates of protection for all lines of manufacturing (indeed, all economic activity), except for infant indus- tries which may need additional protection. Moreover, the protection system could be utilized to provide an appropriate balance between incentives for export industries and industries that compete with imports. 9.13 A protection system designed to promote efficient industrial devel- opment should also take special cognizance of the implications of low tariffs on machinery and equipment. Low tariffs on these over a long period are likely to bias industrial development in the direction of capital-intensive industries and relatively capital-intensive technology, and to discourage local production of the machinery and equipment concerned. Capital-intensive industrialization would seem undesirable in view of the existing problem of underemployment in many public plants (see Volume 3, Annex 3). Moreover, given that domestic manufacturing activity is highly protected, the shadow foreign exchange rate may be higher than the official rate. Thus, lowr import duties on capital equipment would be equivalent to a subsidy. 1/ 9.14 In 1975, Syria formed an economic union with Jordan. Among other things, the union agreement abolished tariffs and import or export licensing for transactions between the two countries, provided that the goods involved have at least 40 percent domestic value added. Thus, it is important that Syria's tariff system on imports of manufacturing inputs be coordinated with that of Jordan so that Syrian producers will not face a competitive disadvan- tage in their home' market and in Jordan. Import and Foreign Exchange Regulations 9.15 Syria follows a comprehensive system of import licensing, foreign exchange control and public sector monopoly of most foreign trade. Ihere are essentially two types of regulations for imports competing with domestic 1/ To the extent that market wage rates may be artificially kept above the shadow price of labor (say, by minimum wage laws), the subsidy on capital would be offset. However, for capital-intensive activities, the off- setting effect of artificially high wages would probably be smaLl. - 258 - industry--total prohibitions and quotas. Imports of a large number of prod- ucts are prohibited. The basic criterion for prohibited goods is the avail- ability of adequate domestic supply. For example, imports of television sets and refrigerators for household use, both produced domestically in abundant quantities, are prohibited. 1/ Protection through prohibition does not seem to be confined to infant industries. For example, imports of textile fabrics similar to the those produced locally are, prohibited, even though the textile industry in Syria has been in existence for decades. 9.16 Imports under the quota system are allowed, subject to foreign exchange availability, for products (such as cement) whose domestic supply is inadequate to meet the demand. In the case of products.with substantial variation in size or quality, quotas are granted for the size or quality range that is in demand but not produced locally. The determination of local supply adequacy and the type of import allowed rests with the Ministry of Industry and the Ministry of Domestic Trade and Supply. 9.17 About 70 percent of total imports (by volume) are monopolized by the public sector, primarily by the General Organizations (GOs) for foreign trade. The six most important GOs, specializing along broad product lines, are supervised by the Ministry of Economy and Foreign Trade. 2/ Special-order goods are usually imported directly by the users (essentially government and public entities). The foreign trade GOs either import on their own account for retail distribution or as agents on commission for the public or private sector. Their commission charges significantly increase the cost of imports, especially to the private sector which must pay a 10 percent charge, as com- pared with 4 percent for public entities. The proportion of imports on behalf of public and private sectors varies by the organization in question. For example, Aftotex (the General Organization for Foreign Textile Trade) which was responsible for more than 75 percent of all textile imports in 1975, im- ported mainly on behalf of the private sector. 9.18 The publicly-owned foreign trade GOs receive a yearly allocation within the framework of the government's annual foreign exchange budget and are authorized to issue their own import licenses. The foreign exchange budget includes a relatively small allocation, estimated at about 10 percent of the total in 1975, for imports needed by the private sector for production inputs and investment goods. However, under policies introduced in 1975, (see para 12.17) imports financed by Syrian,-held balances abroad and suppliers' credits of at least one year are granted licenses freely. The ruling on foreign bank balances, in particular, is believed to have augmented the 1/ The only imports in the prohibited category that are allowed are those through the Annual Damascus Trade Fair. However, imports through the Fair are quite small. Total import authorizations for the Fair in 1975 amounted to about SL 7 million. Actual imports are believed to have been smaller. 2/ The six organizations are Aftometal, Aftomachine, Aftotex, Tafcos, Pharmex and GOTA (General Organization for Trading and Distribution). - 259 - private sector's access to imports of raw materials, intermediate inputs, spare parts and capital goods. It has also enabled private entrepreneurs to avoid many of the administrative difficulties and delays associated wit:h obtaining foreign exchange quotas and import licenses. Price Control 9.19 Price regulation in Syria, governed by the provisions of Law No. 123 of 1960 as amended by Presidential Decree No. 158 of 1969, aims at comprehen- sive control of prices on a wide range of commodities, domestically produced or imported, at various stages, and prices of services (see Chapter 6). The system of price regulation is complex and still evolving. Broadly, it attempts to ensure that essential commodities (particularly foodstuffs) are provided at low and stable prices and that profit margins on other goods are set so as to yield only a "reasonable" return to economic agents, public or private. The price system is viewed as a major income distribution instrument. Prices are not, however, considered as having the function of clearing the markets or providing signals for resource allocation. 9.20 Price policies are generally formulated by the Ministry of Domestic Trade and Supply (MDTS), on the basis of broad guidelines set by the Hligh Economic Council, or in certain instances by the Council of Ministers. The MDTS is also the principal agency responsible for formulating and implement- ing the details of price regulation. Certain other ministries, such as the Ministry of Industry, also play an instrumental role in formulating and executing the government's price policies. 9.21 The system of price determination in Syria as it applies to domestically-produced manufactured goods may be categorized into three groups. First, for "ivital" commodities, producer and consumer prices are fixed by the Council of Ministers, whose approval is also required fcor any subsequent revisions. "Vital" commodities are generally those consiclered basic for either consumption or production. They include sugar, flour, vege- table oils, and cement, among others (see Chapter 6 and its Appendix). The prices of some vital commodities, whether produced domestically or imported, are fixed at below cost, and a subsidy is provided by the Ministry of Finance to cover the losses incurred in production or import. A prime exampLe of a manufactured product sold below production cost is sugar (see Financial Performance of Public Enterprises, this chapter). 9.22 Second, for a far broader range of commodities, including all those produced by public manufacturing enterprises, price regulation takes the form of fixing maximum profit margins both at the production stage and the distri- bution stage. This variation of price control relies on the "cost-plus" formula. Cost for this purpose is defined in the conventional accounting sense, although the cost of similar products in international markets is also used sometimes for comparison. Public enterprises are examined by t:he MDTS (sometimes by factory visits) for relatively homogeneous products, while for heterogeneous product lines such as textile fabrics, the Ministry oij Industry is empowered to set prices on the basis of profit margin guidelines provided by the MDTS. In both cases, factory profit margins allowed above cost usually - 260 - range between 5 and 15 percent; the maximum for processed foods is 10 percent. It is doubtful whether in practice the profit margins allowed bear any relationship to capital-output ratios, or are gauged to permit the recovery of opportunity cost of capital. Moreover, the problem is compounded by the lack of adequate accounting systems in many firms. 9.23 Finally, for P third group of commodities, covering part of private sector production (particularly "luxury" items), price determination is left to market forces. The limited manpower resources of the MDTS preclude the control of prices of all private sector products. As a rule, however, should the public sector undertake the producLion of an item previously produced only by private firms and not subject to price control, the MDTS will bring it under price control. 9.24 The application of price control to private firms is particularly difficult due to poor accounting or lack of accounting records, the tendency to exaggerate costs, and the sheer number of small establishments involved. In cases where similar products are produced by both public and private firms, the MDTS usually assumes that production costs are the same for the latter as for the former, and uniform prices are set for both. Otherwise, the scrutiny of costs in the private sector is based- on a sampling method. In the former case, private producers appear to be able to reap higher profits, as public sector enterprises usually have higher costs, particularly for overhead. This is not universally true, however; in some cases public enterprises enjoy pre- ferential input prices. For instance, cotton yarn, which is produced only in the public sector, is sold to public weaving enterprises at a lower price than to private weavers. -.25 The MDTS intends to move in the direction of more comprehensive price regulation by shifting toward price fixing and away from profit margin regula- tion. It views the latter mode of price control as a temporary expedient in the transition from a market economy to a socialist economy. Effective price control is inevitably a complicated task, whether in the form of fixing prices or profit margins. In either case, it is difficult to determine what is a "reasonable" profit margin, what are the criteria for determining it, and what constitutes reasonable costs -- particularly in view of the widespread absence of cost accounting in Syrian manufacturing firms, including public enterprises. 9.26 Under the present regime of pervasive public ownership, extensive price control, comprehensive import restrictions and the monopoly of import trade by public sector GOs, there appears to be virLually no competition among domestic firms on the one hand, and between domestic firms and foreign sup- pliers on the other. International prices play little, if any, role in pro- moting efficiency of domestic production. The situation is thus one in which checks against inefficiency and incentives to improve productivity are weak. Regulation of Private Investment 9.27 Since the early 1970s the government has been encouraging private investment in manufacturing industry. In 1973, a decision was taken that there would be no further nationalization. This action was followed in 1974 - 261 - by legislation authorizing repatriation of capital for a variety of purposes, including the import of raw materials and other inputs for industry. In a major policy speech delivered before the People's Council in October 1.976, the Prime Minister reaffirmed the government's intention to encourage private sector investment in industry and to extend incentives including assistance in meeting impor. requirements. The status of private industry, however, remains clouded. The nationalization laws have never been formally repealed, nor is there any legislation based on coherent policy to define the status oE the private sector, the areas in which private industry may operate, and the constraints and privileges attending these operations. Current practice suggests that private investment is permitted generally in industries of a small-scale nature, and in areas where it does not compete with public sector enterprise. Industries which produce essential and strategic goods are reserved for the public sector. 9.28 The primary responsibility for interpreting and implementing the government's policy towards private industry lies with the Directorate of the Private Industrial Sector and Crafts in the Ministry of Industry. A license must be obtained from the Ministry of Industry to establish, transfer or expand any private "productive" manufacturing enterprise. A licernse is an essential prerequisite for a private entrepreneur to obtain foreign exchange allocations, import licenses, or bank financing or to take advantage of the existing investment incentives authorized by Syrian tax laws (see Tax Incen- tives below). 9.29 Licensing decisions are made by the General Committee for Licens- ing, 1/ and are based upon the recommendations of the Ministry of Industry's Directorate for Private Sector Industry. Applicants must submit a brief economic, technical and market justification, along with a pro forma invoice for requested equipment purchases. Approval of an application is contingent upon the determination that the proposed activity would not compete with any public sector activities. 9.30 Since 1973, the licensing process has been liberalized to encourage private investment. Average waiting time for licenses is now reportedly less than one month, instead of the extended period required in the past. Moreover, an analysis from the Aleppo region indicates that the current rate cf rejec- tion of license applications is relatively low. In 1975, for example, only about 8 percent of the applications for new private manufacturing establish- ments in Aleppo were rejected, as were less than 5 percent of the applications 1/ The Committee is composed of fifteen members, chaired by the Deputy Minister of Industry, and includes the General Directors of the General Organizations of the public manufacturing sector; repressenta- tives of the Ministries of Economy; Planning; Supplies and Domestic Trade; Health; and Agriculture and Agrarian Reform; as well'as dele- gates from the Customs Bureau, the (private) Chamber of Industry, the (military) General Mobilization Organization and the General Federation for Craft Societies. These members are joined by the Director of Planning and the Director for Private Sector Industry from the Ministry of Industry. - 262 - for expansion of private industrial establishments. The rejected applications appear primarily to represent proposals for ventures that would compete with public sector industry and/or expand capacity beyond perceived demand. The total number of applications also increased substantially--particularly in the period 1973-75. The total number of projects increased from 504 in 1973 to 680 in 1975 and capital investment more than doubled (see Table SA 8A.10). Activity was strongest in the engineering and textile branches. It should be noted, however, that very few private firms have sought to invest more than the pre-1973 limit of SL 100,000 and that relatively few employ more than 20 workers on a permanent basis. For example, in 1975 the average number of workers per project executed was 5 and the average nominal capital was SL 86,000. 9.31 Concurrently with the relaxation of restrictions on domestic private investment in manufacturing, Syria also liberalized regulations governing in- vestment by residents of neighboring Arab states or by Syrian emigrants. How- ever, restrictions on, or incentives to, investment by other foreign parties remain less well-defined. 9.32 Investment by Arab Nationals and Syrian Emigrants. In 1971, Syria ratified the convention of the Arab Investment Guarantee Institution. The institution, established in Kuwait under the auspices of the Arab Economic Union, assures Arab investors of adequate compensation against non-commercial risks, such as expropriation, restrictions on transfer of capital or earnings, exchange rate penalties on capital transfer, or military destruction of assets. Other countries that ratified the convention included Egypt, Jordan, Iraq, Kuwait, Bahrain, the United Arab Emirates, Algeria, Tunisia, the Sudan, Morocco, Mauritania, and Lebanon. 9.33 Legislative Decree 348 of 1969 delineates the specific conditions governing safeguards granted to the capital of Syrian emigrants or other Arab nationals which is invested in development projects or deposited in Syrian banks for three months or more. Among these conditions are: (a) Syrian labor should represent at least 75 percent of the total work force in the investment project; (b) transfer of project property is not permitted until after the first five years of operation; (c) up to one-half of the profits from the investment may be transferred abroad each year; and (d) the cost of the project may be transferred after five years of operation, by transfers of 25 percent yearly. Additional privileges may be authorized by the government on a case by case basis. 9.34 Decree 348 also authorized joint ventures between Arab investors and Syrian public enterprises, the first instance of which has been a jointly- owned company established with Jordan. This company, with an initial joint capital of JD 20 million 1/, is authorized to undertake a variety of projects. 1/ Equivalent to around US$60 million. - 263 - To date, a brick and a cement factory have been considered and a joint Free Zone 1/ is being established on the Syrian-Jordanian border. 9.35 Other Foreign Investment. Non-Arab foreign investments in Syria, except in the Free Zones, must still be negotiated on a bilateral, case by case basis, and must be individually approved by the legislature and by the ministerial-level Investment Committee. However, the responsibilities for the promotion, negotiation, supervision and enforcement of individual foreign investment arrangements are at present distributed among different departments and ministries. Such a decentralized approach may cause delays and conflicts in the future. Streamlining of the present system and substantially better coordination and distribution of information appear essential, as it is extremely difficult for potential investors to obtain even the information needed simply to design appropriate proposals. A general investment code for non-Arab foreign investment is reportedly under consideration by the Govern- ment. 9.36 The Syrian Government has to date entered into a few bilateral manu- facturing investment agreements, each specifying different conditions and concessions for the investors. 2/ In general, these agreements provide for joint stock companies, combining capital of foreign (public and private) investors and the Syrian Government, with control held by a Syrian public enterprise. The agreements provide protection (that is, eventual compensa- tion) against nationalization; permit repatriation of earnings and capital; and authorize exemption from financial and municipal taxes, customs duties and similar levies, and from regulations pertaining to the General Organiza- tions and other state companies, as well as exemption of income and property of expatriate employees from all taxes and dues. In addition, the agreements provide for a Government commitment to purchase the investment if substantial losses are incurred through war or "political decision by the Syrian Govern- ment" and guarantee specified rates of return to the private investor. 1/ Since 1971, a number of Free Zones have been created in Syria for trade, banking and industrial activities. Subject to certain restrictions, activities carried out within the Free Zones are exempt from tariff duties, taxation and other economic regulations. The Free Zones have so far had no appreciable impact on promoting private manufacturing investment in Syria. 2/ Among the existing agreements is one with a Spanish company, which has resulted in the formation of the Euphrates Company for the Manufacture of Tractors (and various agricultural implements). This agreement is the only one as yet to be formally ratified by the legislature and operational. Another agreement is with a French firm to establish a company to produce telephone exchanges. - 264 - Tax Incentives 9.37 The Syrian tax system provides several incentives to manufacturing investment, applicable to both public and private firms. New manufacturing investment is exempt from income tax for three years. 1/ Although deprecia- tion on buildings is normally not a deductible expense for tax purposes, depreciation of buildings constructed for manufacturing activity may be ex- cluded from taxable income for six years, and these buildings are exempt from real estate taxes for six years. An "expansion" reserve of up to ten percent of gross income may be deducted from taxable income, provided it is reinvested within two years. Under bilateral investment conventions such as those de- scribed above, foreign investments may be exempted from taxes for longer periods. INDUSTRIAL DEVELOPMENT AND PERFORMANCE SINCE 1960 9.38 Industrial development in Syria over the last decade and a half has been at least nominally pursued within the framework of the five-year plans, although there is some doubt as to when genuine planning got under way (see Chapter 3). The compound annual rate of growth in gross domestic product and value added accruing to industry (at factor cost in constant 1963 prices) for selected periods from 1960 through 1975 was as follows: 1960-65 1965-70 1970-75 1965-75 1968-75 Mining n.a. 110.5 29.1 64.9 45.0 Manufacturing 2.2 6.6 7.4 7.0 7.4 Electricity, gas, water n.a. 7.3 11.2 9.2 10.3 Construction -3.1 8.5 16.3 12.3 11.7 Total industry, includ- ing construction 2.7 9.4 12.1 10.7 11.7 Gross domestic product 8.3 4.8 7.1 6.0 7.2 9.39 The composition of manufacturing underwent little change during the 1960s. Both at the beginning and the end of the decade, the two most important branches, textiles and food processing, together accounted for about 70 percent of value added in manufacturing at constant 1963 market prices (Table 9.3). Little progress was made before 1970 in two develoment planning objectives: diversification and integration (increasing the proportion of gross output consisting of value added accruing to domestic activities--Table 1/ This exemption is of importance for quick-yielding investments as enterprises, public and private, are taxed according to a progressive schedule which, inclusive of the various surtaxes, ranges from 11 percent on annual taxable income of less than SL 10,000 to 66 percent for annual income in excess of SL 700,000, and the marginal tax rates rise rapidly in the lower ranges (for example, the marginal rate rises to 51 percent for income over SL 110,000 a year). - 265 - 9.4). Only in consumer durables did some diversification become a reality beginning in 1968 when the assembly of refrigerators and television sets got under way, increasing the share of metals and manufactures from 8.7 percent to 11.2 percent of manufacturing value added (Table 9.3). The share of gross output consisting of value added accruing to residents did not increase until after 1972 (see Integration Trends in Manufacturing, below). The share of manufacturing in total GDP at current factor cost had remained essentially unchanged at 15.9 percent in 1960 and 15.4 percent in 1970 (earlier Table 9.1). In industry as a whole, the most important transformation occurred with the development of crude petroleum output, which began in 1968. However, value added from petroleum had reached only about 2 percent of GDP by 1970. The contribution of industry to GDP had undergone a modest increase from 21.1 percent in 1960 to 22.2 percent in 1970. The First Plan Period 1960-65 9.40 The First-Five-Year Plan 1960-1965 aimed at a growth rate of about 9 percent a year for the industrial sector, which was defined as including manufacturing, mining and quarrying and utilities, but excluding construction. About 70 percent of the planned investment of SL 544 million in industry (representing about 20 percent of total planned investment) was to be under- taken by the public sector and the remainder by the private sector. No reli- able estimate of actual investment expenditure realized in industry during the First Plan period is available. The sluggish actual rate of growth in value added in industry from 1960 through 1965 may have been attribut:able in part to the political instability of the period and to the onset of the nationalization program during the last two years. - 266 - Table 9.3: SUB-SECTORAL SHARE OF VALUE ADDED IN MANUFACTURING FOR SELECTED YEARS AT 1963 MARKET PRICES, 1960-75 /a (Percent of Total) Branch of Manufacturingt 1960 1965 1970 1975 Food, beverages and tobacco 22.0 24.0 21.9 26.1 Textiles, wearing apparel and leather industries 47.6 50.6 49.2 45.7 Manufacture of wood products, including furniture 8.2 4.1 2.7 5.5 Paper and paper products, printing and publishing 0.6 0.6 0.6 1.0 Petroleum products, chemicals and related products 10.3 8.1 10.4 11.1 Nonmetallic mineral products, not elsewhere specififed 3.6 3.9 4.0 2.8 Basic metals ) Fabricated metal products, machinery and equipment) 8.7 11.2 7.8 Total value added accruing to the manufacturing subsector /a 100.0 100.0 100.0 100.0 /a Gross domestic product is the sum of value added in domestic activities. Value added in a sector of activity comprises compensation of employees, operating surplus (profit), consumption of fixed capital (depreciation) and, at market prices, indirect taxes net of subsidies. /b Listed by major divisions of the United Nations International Standard Industrial Classification (ISIC). Source: Central Bureau of Statistics. - 267 - Table 9.4: VALUE ADDED AS A PERCENTAGE OF GROSS OUTPUT BY SUB-SECTOR IN MANUFACTURING INDUSTRY, 1960-75 (At 1963 market prices) Subsector 1960 1965 1970 1971 1972 1973 1974 975/a Food, beverages and tobacco 45.5 46.9 48.2 48.0 47.9 42.4 59.2 56.9 Textiles, wearing apparel and leather goods 34.5 34.1 33.5 33.4 33.5 42.5 43.4 43.3 Wood and wood products, includ- ing furniture 43.7 43.7 43.5 44.6 45.1 49.0 49.0 48.7 Paper and paper products, printing and publishing 62.5 70.0 60.0 60.0 58.8 39.0 40.4 39.3 Chemicals 24.1 25.7 29.6 28.9 29.1 28.3 31.8 27.7 Non-metallic mineral prod- ucts, except products of petroleum 50.0 50.0 58.7 58.6 57.9 53.1 53.2 50.0 Basic metals ) Fabricated ) metal products, ) 42.5 43.0 43.0 42.9 42.5 50.0 50.0 49.8 machinery and ) equipment ) Total 38.0 38.5 38.8 38.4 38.7 42.4 47.3 46.1 /a Preliminary Source: Central Bureau of Statistics. - 268 - The Second Plan Period 1966-70 9.41 The underlying philosophy of the Second Five-Year Plan 1966-1970 for manufacturing development was the substitution of "socialist production relationships" for "capitalistic relationships". 1/ Accordingly, the Plan emphasized capital formation by the public sector in manufacturing. An in- dicative target of SL50 million was set for private manufacturing. Planned investment for public sector manufacturing was SL295 million, some 8.6 per- cent of the overall public investment target for the Plan period 1966-70. The public investment target for phosphate mining was set at SL53 million. The initial plan target of SL348 million for phosphate mining and public sector manufacturing combined was later revised to SL537 million (representing a mix of constant 1965 and current prices). Investment expenditure actually real- ized for the 1966-70 period is estimated at about SL365 million, some 68 per- cent of the planned outlay. 2/ Major projects in public sector manufacturing investment included a plant for phosphatic and nitrogen fertilizers at Homs, allocated nearly 25 percent of the sector target; a steel rolling mill, and textile and food processing plants. A number of smaller projects in chemicals and engineering (machinery and equipment) were also proposed.- Two of the Plan's major projects, for fertilizers and steel rounds, did not enter pro- duction until the early 1970s due to delays in project implementation and start-up difficulties with the completed plants. 9.42 The general objectives of industrial development during the Second Plan period were stated broadly and consisted primarily of (a) increasing exports and decreasing imports; (b) developing industries to meet the require- ments of agriculture; and (c) integrating production with the industry of other Arab countries and the Arab Common Market. From the main projects included in the Plan, it would appear that the investment strategy for the sector was primarily aimed at developing the traditional subsectors--food processing and textiles. The two notable exceptions were the projects for a fertilizer factory and for a steel rolling mill using imported billets. Despite the stated objective of increasing exports, the investment program aimed almost exclusively at import substitution--increasing domestic produc- tion of goods to replace (substitute for);imports. I/ Ministry of Planning, Second Five-Year Plan 1966-70 - Basic Elements (Damascus: Office Arabe de Presse et de Documentation, 1966) p. 28. 2/ Data on actual investment expenditure (not available for manufacturing alone) are from Central Bureau of Statistics, Statistical Abstract of Syria 1973 (Damascus, 1973). The 68 percent implementation rate may be considered as reasonably approximating constant prices, as inflation was quite low during the Plan period (an estimated 6 percent as measured by the implicit price deflator for public gross fixed capital formation from the national accounts). - 269 - 9.43 The growth target for the manufacturing sector during the Second Plan period was not stated separately from that of the industrial sector (defined to include manufacturing, mining and power). Industry was expected to grow at an average annual rate of 11.8 percent, thus contributing 30.8 percent of the planned GDP annual growth rate of 7.1 percent during 1966-70. 9.44 The Second Plan period witnessed a number of difficulties in the manufacturing sector. Before the nationalization measures of 1964 and 1965, the major manufacturing entities had been family-owned, and a cadre of pro- fessional managers did not exist. The nationalizations led to the exodus of many industrial entrepreneurs, engineers and technicians from the coun,try. Those entrusted with the management of the public firms were largely indivi- duals with little or no experience in managerial and technical aspects of manufacturing operations. The 1967 war and the concomitant financial burdens of the government compounded the problems of the public sector's manufacturing sector during this period. Upon the interruption of its relations with the West in 1965/66 Syria turned to the Eastern European countries for financial, technical and organizational assistance. 9,45 Despite the above difficulties, during the Second Plan period value added in the manufacturing sector as a whole (public and private) is estimated to have increased at an average annual rate of about 6.6 percent in constant 1963 prices against a background of real GDP growth of 4.8 percent annually. However, the growth of manufacturing activity as measured by the Index of Industrial Production averaged only 4.9 percent a year from 1965 through 1970 (Table 9.5). For the same period growth in the major manufactures pr e- sented a mixed picture. Physical output increased in quantity by 5.6 percent a year for sugar, 1.7 percent for cotton yarn, and 8.7 percent for cement; but 1970 production of vegetable oil and ginned cotton was about 25 percent below 1965 (from Table SA 8A.6). 1/ 1/ 1970 was not an abnormal year for industrial production. The output of some of the nationalized industries had declined immediately after nationalization, but resumed its upward trend beginning in 1969. Un- doubtedly, some dislocations in production were due to the 1967 war. - 270 - Table 9.5: INDEX OF INDUSTRIAL PRODUCTION 1966-70 (1965=100) 1966 1967 1968 1968 1970 Manufacturing Industries 104 100 102 120 127 Food 105 96 97 105 109 Beverages 103 97 95 115 117 Tobacco 91 113 134 181 171 Spinning and Textiles 138 154 151 163 200 Paper 108 108 107 148 204 Rubber 97 103 132 130 137 Chemical 110 110 110 136 137 Non-Metallic 104 94 94 137 145 Mining and Quarrying 60 94 537 1,048 1,848 Source: Central Bureau of Statistics, Statistical Abstract of Syria, 1973. 9.46 The labor force in manufacturing (including some unemployed--see earlier Table 9.2) increased at an average annual rate of about 4 percent between the population censuses of 1960 and 1970. Its share in the total labor force rose slightly, from 11.8 percent in 1960 to 12.1 percent in 1970. in 1970 the labor force in manufacturing was almost equally divided between wage earners and the self-employed. 1/ In 1970 about 24 percent of the labor force or 48 percent of the wage earners in manufacturing were in public enter- prises. After the nationalizations of the mid-1960s public enterprises had followed an active policy of absorbing some of the unemployed. 2/ It is not clear to what extent this policy may have contributed to the growth of employ- ment in the sector. DEVELOPMENT STRATEGIES AND PERFORMANCE 1971-75 9.47 The real growth of manufacturing value added in the Third Plan period is estimated to have been 7.4 percent a year, slightly higher than the growth experienced in the previous five years. By contrast, value added in the mining sector increased at an average annual rate of about 29 percent between 1970 and 1975, mainly as a result of the increase in crude petroleum offtake from 4.2 million tons to 9.6 million tons in 1975. Comparison of the growth performance of the manufacturing sector with the Plan's target is not I/ Similar information is not available for 1960. 2/ See Ziad Keilany, "Economic Planning in Syria, 1960-65: An Evaluation," The Journal of Developing Areas, April 1970, Note 16. - 271 - possible since the latter was for manufacturing, mining and power combined. This target was 15.8 percent growth a year, for the Plan period; the growth rate actually realized was about 11.5 percent a year. 9.48 The rapid increase in the output of the mining sector relative to that of the manufacturing sector during the Third Plan period significantly transformed the composition of industrial (manufacturing and mining) value added and its share in GDP over the five-year period (see Table 9.1). 9.49 Growth of manufacturing output in the first half of the 1970s was restrained by the slow rate of expansion of capacity in those lines for which domestic demand was growing rapidly, such as cement. There were shortages in such lines, but underutilization of capacity in others. There was slow growth and little diversification of manufactured exports (below). Shortage of funds and other constraints on public investment in the sector during the first three years of the Third Plan period delayed the implementation of many of the projects, thus reducing their planned impact on the growth of the sector's output. 9.50 On the relative contributions of the public and private secl:ors to the growth of manufacturing the evidence is inconclusive, owing largeLy to the lack of data in constant prices. The constant price deflator used for manufacturing as a whole appears to be too high; if applied to the current price data for public versus private manufacturing in Table SA 8B.l, it would indicate slightly negative real growth from 1970 through 1975. This conclu- sion would clearly be unwarranted, as quantitative output in the public sector experienced a growth of 6 to 7 percent a year in 1970-75 (Table SA 8A.6 and Volume 3, Annex 2). To compound the confusion, Table SA 8A.8 cited earlier shows that in current prices the relative share of the private sector in total manufacturing output increased from 46 percent in 1970 to 57 percent in 1975. This shift may have been due wholly or in part to the more comprehensive application of price controls to public enterprises overstating the perform- ance of the private sector. 9.51 The share of investment in industry (manufacturing, mining and power) in total net capital formation in Syria increased from 19 percent to 44 percent (in constant 1963 prices), and from 18 percent to 42 percent (in current prices) between 1970 and 1975 (Table SA 2A.5). In constant prices, industrial investment increased at an impressive average annual rate of about 45 percent. 9.52 For manufacturing alone, investment during the Third Plan period amounted to about SL 1,480 million in current prices, of which nearly 90 percent was undertaken by the public sector (Table SA 8A.9). 1/ Nearly 85 1/ Private investments may be under-declared, as fears of nationalization are still harbored; thus the share of the private sector, and the resulting total investment figure, could well be understated. - 272 - percent of public sector's manufacturing investment expenditure and 65 per- cent of the private sector's were undertaken in the final two years of the Plan period. The upsurge in public expenditure was made possible by the substantial increase in oil export income and the large inflow of grants and remittances from Arab oil-exporting countries and of loans from both the Eastern Bloc and the West. Private investment, though still quite small, was stimulated primarily by improved confidence and the liberalization measures taken by the Government. 9.53 The manufacturing investment of SL 1,480 million in current prices for 1971-75 may have been equivalent to about SL765 million in constant 1970 prices, of which about SL 670 million was the public sector's share. 1/ As the original Third Plan target for public manufacturing investment was about SL 1,290 million in 1970 prices, the implementation rate would have been in the order of 52 percent. 2/ 9.54 However, the original Plan targets for total investment and invest- ment in public manufacturing had undergone substantial upward revisions, particularly towards the end of the Plan period when additional financial resources became available. Accordingly, in manufacturing, practically all the Third Plan's new projects (those not carried forward from the Second Plan) were redesigned, and other projects were added. By 1975, the revised Plan target (that is, the cost of public manufacturing projects completed, partially implemented or yet to be implemented) was estimated at about SL 8.4 billion (see Table 9.6). Most of the manufacturing projects included in the Fourth Five-Year Plan 1976-80 have been inherited from the Third Plan. 3/ 9.55 The strategy of the Third Five-Year Plan for manufacturing develop- ment, as enunciated in the Plan document, was essentially the same as that of the Second Plan; that is, replacement of imports to achieve greater self- sufficiency in consumer goods and intermediate materials, and promotion of exports. Accordingly, expansion of the textile, food processing, consumer 1/ Constant price data for manufacturing investment 1971-75 are not available; the constant price estimates have been obtained by applying the constant price deflator for industry as a whole. This may be un- warranted, as it disregards the possibility of differential inflation rates in the constituent subsectors of industry. 2/ The SL 1,288 million target included SL 530 million of so-called reserve projects (projects that were to be implemented if financing could be found). The implementation rate was 87 percent of the target excluding reserve projects; but most of them were undertaken, except for those in food processing. 3/ Expenditure through the end of 1975 on the projects added to the Third Plan in its latter phase, was thought to have been only about 5 percent of their projected costs. - 273 - durables and cement industries received considerable attention in the invest- ment program. However, some of the major production targets of the Plan were not fulfilled, primarily as a result of the delays experienced in project implementation. Two cases in point are those of cotton yarn and cement--both long-established industries. The output of cotton yarn increased from 20,000 tons in 1970 to 32,000 tons in 1975, as compared to the target of 48,000 tons, while the output of cement grew from 900,000 tons in 1970 to nearly one mil- lion tons in 1975 agains-t the planned target of 1.8 million tons. Table 9.6: PLANNED AND ACTUAL INVESTMENT IN PUBLIC MANUFACTURING, SYRIA, 1970-75 (Millions of Syrian Pounds) /a (1970 Prices) (Current Prices) Original Revised Actual Plan Plan Realized Target Target /b Investment Branch of Manufacturing 1970-1975 1970-1975 1970-1975 Food, beverages and tobacco 281.7 1,526.7 243.7 Textiles 370.6 1,640.7 450.8 Cement, Chemicals, Engineering (metal manufactures, machinery and equipment) 635.4 5,223.1 621.7 Total public manufacturing 1,287.7 8,290.5 1,315.2 /a For dollar value of the Syrian pound, see Table SA 3E.2. /b The revised target is made up of two components. The first, totalling SL 3.9 billion, is the revised cost of the plan's original projects, as modified or completely redesigned. The second, totalling SL 4.5 bil- lion, covers the cost of new projects added to the plan while it was in progress. It was the intention of the planners that all but a fraction of the new projects under the second component would only just be started before the terminal date of the Third Plan in 1975. Source: Ministry of Planning, (Arabic Title) Third Five Year Plan fcr Economic and Social Development in the Syrian Arab Republic T971- 1975, (Damascus, Office Arabe de Presse et de Documentation, 1971); Central Bureau of Statistics, Statistical Abstract, various years; and Ministry of Industry. Integration in Manufacturing 9.56 An objective of both the Second and Third Plans was to improve do- mestic earnings by vertical integration of production--that is, by increasing each sector's input of domestic materials or factors of production (backward linkage) and its output of finished goods for domestic consumption and for export (forward linkage). Successful integration would be reflected in an - 274 - increase in the proportion of gross value added in total output (see earlier Table 9.4). This result could also be achieved by increasing the use of the factors of production (labor and capital) and hence the incomes accruing to them, in relation to the use of intermediate materials. Because capital must often be sought abroad but labor is in surplus domestic supply, increased reliance on labor input in place of capital could also augment the domestic value added content of gross production. 9.57 From 1960 through 1972 the share of value added in gross manufactur- ing output had remained essentially unchanged, indicating an apparent lack of progress in integration by backward or forward linkage between domestic sectors of activity (see Table 9.4). For 1973 and 1974, in contrast, the table suggests that the value added content of gross output increased sharply in textiles and in total manufacturing, but declined radically in paper manufacture, printing and publishing. This may only be a statistical phenom- enon; the 1963 base used for constant price deflation, for example, may fail to eliminate fully the 1973 inflation in material costs and public sector wages (see Chapter 3). 1/ Genuine structural change of the magnitude shown seems unlikely to have taken place so quickly. It would imply a considerable shift to a more (or less, for paper) advanced stage of processing and/or the substitution of factors of production (labor and capital) for material inputs in the production process. Both trends, particularly the former, are feasible over a reasonable time horizon, but there is no indication that such transfor- mation actually took place in Syria in the period in question. 9.58 In this static context, an interesting feature of Table 9.4 is the relatively high value added content of food processing, which in Syria is a relatively labor-intensive, resource-based industry. In contrast, the chemical industry, which includes related products (rubber, plastic, petroleum and coal products) and is a relatively capital-intensive and substantially import-based industry, had the lowest value added content in manufacturing. Location of Industry 9.59 An important element of the Government's development objectives is to ensure greater dispersion of industry in the future. In the past, the loca- tion of industry seems to have been determined by a combination of economic factors, including: proximity to raw materials and markets; access to needed services and infrastructure; and the need to attract workers, which is easier in the major urban centers, particularly for managerial and skilled manpower. As a result, it appears that industry is far too concentrated in the urban areas, particularly in Aleppo and Damascus. About 80 percent of public manu- facturing plants in 1975 were located in the four major cities of Damascus, 1/ Analysis of current price data for public manufacturing indicates a sharp rise in the value added content of output only in 1974 (from 34.7 percent in 1973 to 44.1 percent). This rise may be a reflection of the fact that a significant wage increase was granted to public sector employees in mid-1973 and a smaller one in 1974, while price adjustments lagged and were not comprehensive. - 275 - Aleppo, Homs and Hama. The geographic distribution of manufacturing employ- ment reported in the 1970 population census was confirmed by the population sample survey of 1975 1/, which revealed essentially the same pattern, as follows: Percent of Location Total Employment Aleppo 28 Damascus 26 Homs 5 Other urban centers 24 Rural Areas 17 Total, Syria 100 Employment and Labor Productivity 9.60 The existence of a large number of artisan workshops and other small-scale units in Syria's manufacturing sector, coupled with the absence of a comprehensive industrial census, makes it difficult to know accurately and to interpret employment trends in manufacturing. Data from sample surveys indicate that manufacturing employment increased at an average annual rate of 4.5 percent from 1971 through 1975, compared to an average annual rate of 4.0 percent in the 1960s (see Table 9.2). 2/ Total employment in all activities is thought to have grown at the rate of 3.1 percent a year from 1971 lthrough 1975. 9.61 The labor force in public manufacturing, for which data are thought to be reasonably accurate, increased from about 48,400 in 1971 to 63,100 in 1975, an average annual increase of about 7 percent (see Table SA 8B.2). 3/ The increase in employment in absolute numbers was greatest in the textile industry, followed by the food processing and chemical industries. The increase of 14,700 in the number of workers in public manufacturing from 1971 through 1975 compared with an increase of 33,500 workers in manufacturing as a whole. 9.62 As Table SA 8B.2 indicates, the textile and food processing indus- tries combined accounted for about 70 percent of the growth of the labor force 1/ Reported in Central Bureau of Statistics, Statistical Abstract of Syria 1976. 2/ The year 1971 rather than 1970 was used as the base year for comparison with 1975 because employment data for 1970 are from census returns and may not be comparable to the data from sample surveys used for the years between censuses. 3/ All three figures include an estimated 7,000 seasonal workers engaged mostly in the cotton-ginning plants, which in Syrian statistics are included in manufacturing. - 276 - in public manufacturing enterprises between 1970 and 1975. Significant growth of employment was also experienced in chemicals and fabricated metals, the most modern branches of manufacturing in Syria. 9.63 Assessment of labor productivity in Syrian manufacturing industry is hampered by lack of appropriate data as well as by the usual conceptual and statistical difficulties associated with productivity measurement where esti- mates of well-specified-production functions are lacking. A crude indication of labor productivity can be calculated by dividing employment in manufactur- ing into the national accounts estimate of value added at constant 1963 factor cost accruing to manufacturing activity (see Chapters 3, 4 and 6 and Tables SA 1A.4 and SA 2B.1). This yields an average annual rate of increase in value added per worker in manufacturing of about 2.3 percent from 1971 through 1975. 9.64 Data on employment, output and productivity in public and private manufacturing have been published separately only for 1975 (see Table 4.6). There is no reliable constant price series for value added in public manufac- turing. However, on the assumption that the growth of real output in public manufacturing was about 6 or 7 percent a year from 1971 through 1975, it can be concluded that there was little, if any, gain in real output per worker, as the number of workers in public manufacturing also increased by about 7 percent a year in the same period. Such a conclusion, however tentative, is not surprising in view of the overstaffing problem affecting many public enterprises (see Volume 3, Annex 3). 9.65 In the public textile industry, which was studied in some detail, labor productivity levels in spinning are low as a result of both poor yield per spindle/hour and substantial overstaffing of the production processes. For example, it is estimated that the 1975 output of 34,000 tons of cotton yarn could have been achieved with substantially fewer workers by increasing the number of spindles per worker and eliminating superfluous work stations. In weaving there is a similar problem of excess manpower and low productivity (see Volume 3, Annex 3). Utilization of Capacity 9.66 Underutilization of capacity is a problem in a fairly large number of manufacturing plants, but information is available only for plants in the public sector. On the basis of data provided by the General Organizations, the following capacity utilization rates were estimated for 1974 or 1975. The rates give actual output as a percentage of estimated "effective" capacity, which in some cases is considerably lower than "rated" capacity, as follows: - 277 - Actual Output as Percent of Branch of Public Manufacturing Year Effective Capacity Sugar 1975 50 Food procejsing, other 1975 54 Textile manufacture: Spinning 1974 76 Weaving 1974 79 Dyeing 1974 61 Bleaching 1974 74 Printing 1974 72 Wool carpets 1974 31 Chemicals and related products 1974 54 Engineering (metals, machinery) 1975 57 Cement and porcelain 1975 100 Asbestos 1975 83 As the data illustrate, average capacity utilization rates were particualarly low in food processing, sugar, chemicals and engineering plants. The average rates depicted, of course, conceal considerable variation in capacity utiliza- tion among various plants in the same industry. For example, in the food processing, chemicals and engineering industries, some plants operate at or near full capacity while a substantial number have 60-70 percent unutilized capacity. 9.67 The reasons for low capacity utilization vary not only among the various branches of manufacturing, but also from plant to plant and sometimes according to product lines. Nevertheless, a number of basic factors under- lying the problem are identifiable. These are, not necessarily in order of importance: (a) shortage of technicians and other skilled manpower; (b) irregular and insufficient raw material supplies, particularly for imported spare parts and components; (c) frequent power cuts; and (d) inadequate planning of production and marketing. Existing capacity has often been based upon overoptimistic demand forecasts in the first place, and poor planning also includes insufficient flexibility in responding to changing demand conditions. These factors are analyzed in detail in Volume 3, Annexes 3 and 4 on the individual General Organizations. 9.68 Aware of the capacity underutilization problem in the public manu- facturing sector and cognizant of the fact that substantial growth could be generated by more fully utilizing existing production facilities, the Syrian authorities have commissioned a group of experts, under the direction of the State Planning Commission, to undertake a detailed plant-by-plant analysis of the extent and causes of capacity underutilization in public manufacturing and to recommend remedial measures. Based on the mission's observations, a number of measures suggest themselves that might help solve this critical problem: (a) strengthening the technical staff in the plants; (b) increasing control and supervision in the plants, particularly on the afternoon and night shifts; - 278 - (c) making available more funds for timely procurement of imported supplies, including spare parts and components, and for necessary renewals and replacements; (d) increasing coordination with the agricultural sector to ensure adequate supplies for food processing plants; (e) modernizing the old plants (many 20 to 30 years old); 1/ (f) ensuring continued power supply, if necessary by installing standby generating capacity for plants where frequent power cuts are costly (for example, fertilizer plants); (g) placing greater emphasis on marketing; and finally (h) introducing greater flexibility in altering the production mix in response to changing demand conditions. Price and Wage Trends 9.69 Manufactured goods, like most other commodities, are subject to pervasive price controls (see Appendix 6A to Chapter 6). This is in consonance with the government's policy of ensuring low and stable prices, particularly for basic consumption and production goods. However, except for such staple consumer goods as sugar and low-grade cotton fabrics, the government has per- mitted part or all of the increased production costs arising from substantial wage increases or other increased input costs to be passed on (albeit in many cases with substantial lags). 9.70 There are no comprehensive indicators of price trends for manufac- tured goods in Syria. On an aggregate basis, the wholesale price index indicates that prices of manufactured products (excluding building materials and fuels) increased by about 109 percent between 1970 and 1975. The price increases were particularly sharp in 1973 and 1974 (22 and 42 percent respec- tively). In 1975, the rate of increase slowed down to 12 percent. However, it is not possible to gauge the inflation rate for domestically-manufactured goods from the wholesale price index because of its limited coverage and the inclusion of imported goods. The General Organizations have provided informa- tion on ex-factory prices of selected domestically manufactured goods in 1974 and 1975, as follows: 1/ There is a continued need to modernize and balance operating plants and to finance replacements since a substantial part of the installed capacity of the public sector units is old, worn out or technically unbalanced. - 279 - Price Index Product Year (1970 = 100) Paint 1974 243 Soap 1974 148 Bicycle tires 1975 228 Pickled leather 1975 395 Glass containers 1975 125 Cardboard boxes 1975 143 Cement 1975 185 Matches 1975 155 Plywood 1975 216 Refrigerators 1975 126 Gas stoves 1975 225 Liquid batteries 1975 112 Television sets 1975 109 Paper handkerchief tissues 1975 135 Cotton yarn 1975 147 Woolen yarn 1975 130 Synthetic yarn 1975 257 Cotton specialty fabrics 1975 145 Woolen fabrics 1975 184 Synthetic fabrics 1975 212 9.71 In 1974 price increases were particularly steep for products having a high import content. 1/ Price increases are usually permitted only in response to cost increases, but some price increases in the public sec.tor have been effected to reduce the subsidy element and/or to bring domestic prices into line with those of imports and to reduce profiteering in the black market in cases where supply shortages exist. Cement, whose price increased by 85 percent between 1972 and 1975, is a case in point 9.72 The rate of increase in prices is thought to have slowed dowqn in 1975, and for some items, such as bicycle tires, prices in fact declined slightly in 1975. The rates of price increases in manufacturing are 'believed to have further abated in 1976. 9.73 The relatively high rate of inflation experienced in the Syrian economy since 1972 has generated considerable pressure for wage increases. 2/ 1/ For more details on ex-factory price changes during 1970-75, see Volume 3, Annex 3, Chapter 2. 2/ The rate of inflation, as measured by the index of retail prices in Damascus, was 12 percent in 1973, 15 percent in 1974 and 16 percent in 1975. - 280 - The pressure on wages in the public sector has been accentuated by the increas- ing employment opportunities, at substantially higher wages, in the private sector and in the Arab oil-exporting countries, particularly for skilled man- power. 9.74 Aggregate or sectoral wage index data are not available for Syria. According to the Statistical Abstract 1976, however, annual earnings in public manufacturing from 1970 to 1975 evolved as follows: Growth 1970-1975 Public Manufacturing Unit of Measurement 1970 1975 (Percent) Total wage and (Millions of Syrian pounds) 149.5 338.5 126 salary bill Number of workers (Thousands) 45.4 63.2 39 Average annual (Syrian pounds per year) 3,292 5,356 63 earnings per worker The 63 percent increase in average annual earnings per worker from 1970 through 1975 gave an average annual rate of about 10 percent. Of this increase, about 60 percent occurred in 1974 and 1975. The government had granted a significant across-the-board increase in wages and dependency allowances for public sector employees in 1973 and further increases in 1974 and 1975. 1/ Private sector wages for skilled workers are believed to have outpaced those in the public sector. 9.75 Drawing inferences from the highly aggregative data above is sub- ject to the usual caveats. In particular, it should be noted that the index of nominal earnings ignores any changes that might have occurred in the mix of skills or in the number of full-time versus seasonal workers. Given our earlier conclusion on the lack of growth in labor productivity in public sector manufacturing for 1970-75, we may nonetheless risk the conjecture that the wage increases granted were in response not to real productivity gains but to consumer price rises and to wage competition from the private sector and neighboring oil-exporting countries. Wage increases exerted sig- nificant upward pressure on production costs, which were also affected by the rising costs of material inputs. Cost increases were not matched by the sale price increases permitted for some product lines, and thus affected adversely the ability of some enterprises to generate surpluses for financing replace- ment and expansion investment. This seems to have been particularly true in textiles, the largest branch of manufacturing. 1/ The average monthly earning for public sector manufacturing employees in 1972 was about SL 280 a month; the increase granted in 1973 was SL 50 a month. - 2c8 1 - Export Performance of Manufacturing Industry 9.76 In the past, Syria's investment strategy in manufacturing has been oriented largely towards import replacement. Hence the contribution of manu- factured exports to the growth of total export earnings has been modest. Cotton and, more recently, crude petroleum have provided the bulk of export earnings. According to data furnished by the Central Bureau of Statistics (Table SA 3D.0) the value in current prices of exports of semi-manufactures and finished goods, at SL138 million, was about the same in 1970 as in 1965; over the ensuing five (or ten) years it had almost tripled, to SL387 million, but this was attributable largely to price increases. In contrast to the average annual growth in current prices of about 28 percent a year during 1970-1975, the estimated real growth of manufactured exports, deflated by a composite of unit values of the main manufactured exports, was about 6.7 percent a year in 1970-75, slightly lower than the real growth rate in total manufacturing output. The share of exports of semifinished and finished products in the current value of total export earnings had declined sharply from 21.2 percent in 1973 to 11.2 percent in 1975, largely because of the steep gain in export earnings from crude petroleum. Syria's-exports oE manufactures have gone primarily to other Arab countries and to the cenltrally planned socialist countries. 9.77 Syria's exports of manufactures have gone primarily to other Arab countries and to the centrally planned socialist countries. Exports are carried out under bilateral trade agreements with the People's Republic of China, the Democratic People's Republic of Korea (North Korea), the Democratic Republic of Vietnam, and the Soviet Union. These countries are the main market for Syria's exports of textile fabrics. 9.78 The share of exports of manufactures in total exports has, however, declined from 13.2 percent in 1970 to 10.2 percent in 1975. The sharp growth of export earnings from crude petroleum beginning in 1974 largely accounts for the decline in the relative share of manufactures in total exports. The share of manufactured exports in total exports excluding petroleum has risen from 16 percent in 1970 to 34 percent in 1975. 9.79 The official Syrian foreign trade statistics for 1971-75 list some 70 manufactured exports with a 1974 value of more than SL350,000. A detailed study of these items, which constituted about 85 percent of total exports of manufactures in 1974 and 1975, yields the following breakdown by commodity classification 1/ (in millions of Syrian pounds): 1/ Official Syrian foreign trade statistics follow the United Nations Standard International Trade Classification (SITC), which does not correspond to the ISIC breakdown of manufacturing by branch. - 282 - Commodity Group 1971 1972 1973 1974 1975 Processed Foods 5.6 7.0 11.4 23.0 8.8 Cigarettes - 0.5 34.4 52.3 43.2 Wood products 0.7 0.4 1.1 2.8 2.3 Chemicals 1.1 1.5 3.6 5.2 5.5 Textile yarn and fabrics 30.8 58.2 81.2 105.4 88.3 Clothing 22.0 36.1 54.5 63.2 79.3 Footwear and luggage 1.3 2.3 3.1 4.0 4.8 Products of non-metallic minerals 2.8 5.2 4.4 7.5 2.5 Metal manufactures, machinery and equipment 5.3 9.5 15.9 23.9 36.8 Other manufactures valued at more than SL350,000 0.9 2.9 3.4 3.9 2.8 Total of the sample 70.9 123.6 213.0 291.2 274.3 9.80 Textile products (fabrics and yarn, in order of importance) and clothing dominate the exports of the sector, but their relative importance has been declining. Their share in the sample was about 75 percent in 1971 but had declined to 61 percent by 1975. Cigarettes, processed foods, and engineering and metal products are the other important export commodities. Modest diversification away from traditional exports of textiles and processed foods seems to have been accomplished since 1971. 9.81 The distribution of exports of manufactures between public and pri- vate enterprises, available only for 1975, indicates that the private sector accounted for 61 percent of manufactured exports. 1/ Private manufacturing firms contributed 78 percent of total exports of textile products--still the largest single category among exports of manufactures. 9.82 The export incentives system is limited to a subsidy on exports of cotton yarn and fabrics. 2/ The subsidy ranges from 6 to 12 percent of the selling price depending on the degree of processing. In addition to the explicit subsidy on textile exports, these exports are also implicitly sub- sidized, as the price paid by the General Organizations for the cotton they buy from farmers is about half the world price. Consequently the need for the textile export subsidy should be reassessed. 3/ On the other hand, a more comprehensive export incentive system may be essential to stimulate exports, particularly by public manufacturing enterprises whose performance in this respect has not proved to be encouraging. 1/ Statistics of Foreign Trade of Syria 1975, Table 17. 2/ The subsidy, provided by the Export Promotion Fund of the Ministry of Industry, is financed from the proceeds of a levy of SLO.20 per kilo- gram on yarn production. Both public and private firms may avail themselves of the subsidy. 3/ See Volume 3, Annex 3. - 283 - 9.83 Table SA 8B.5 shows the exports of the General Organizations (GOs) for Food, Textiles, Chemicals and Engineering. 1/ These may be summarized as follows (exports as a percentage of total sales): General Organization for 1970 1971 1972 1973 1974 1975 Food 31.2 28.8 32.8 24.4 16.3 13.0 Textiles 8.9 8.2 14.1 19.1 10.4 10.1 Chemicals 7.7 7.2 9.5 6.2 2.7 4.1. Engineering 4.3 2.4 1.2 1.6 0.3 0.1 Total 13.5 14.3 14.7 15.7 8.2 7.2 The export performance of the General Organizations, which had improved between 1970 and 1973, has since declined sharply. The deterioration has been particularly pronounced in the larger export categories, food processing and textiles. This may be explained largely by growing domestic demand and by shortages of some raw materials (those for the food processing industry, for example). In the chemical and engineering industries, which are strongly oriented towards import replacement, export performance also deteriorated despite the existence of underutilized capacity and the accumulation of inventories in some product lines. 2/ Mounting domestic demand for such items as glass is one of the underlying reasons for poor export performance by the public sector; another is that certain major products, such as television sets, are not competitive on foreign markets. Others, such as leather, are in dwindling supply. The absence of a concerted marketing effort has also curbed export expansion (see Volume 3, Annex 3, The Public Manufacturing Sector). 9.84 The Ministry of Industry has provided data on the export targets of the leading General Organizations. Separate targets for the Chemical and Engineering GOs are not available. Annual exports as a percentage of annual targets were as follows: General Organization for 1971 1972 1973 1974 1975 Food 64 154 73 67 74 Textiles 68 66 68 46 63 Chemicals and engineering 51 74 37 31 50 1/ The General Organizations for Sugar and Cement do not export any of their production. 2/ A case in point is television sets; in 1975 about 39,000 units were produced, 29,000 units were sold locally, and the rest were accumulated in inventories. - 284 - As may be observed, with one exception there have been persistent and often large shortfalls in achieving the export targets, despite the fact that annual targets were often revised downward in view of the previous year's performance. One important reason for the shortfalls may lie in the absence of an incentive system which would reward the General Organizations for attaining or exceeding their targets and would penalize them for shortfalls. This issue is discussed further in the next chapter in the context of the broader problem of target formulation and performance evaluation in public enterprises. Financing of Manufacturing Investment 9.85 As noted earlier, the public sector undertook about 90 percent of the estimated investment outlays in manufacturing during 1971-75. Public investment outlays were financed primarily through (i) self-financing (funds generated internally by enterprises); (ii) the government capital investment budget, commonly called in Syria the Public Debt Fund; and (iii) foreign loans and grants. In addition, the government-owned Industrial Bank in recent years contributed an estimated 4 percent of total public outlays for manufacturing investment. 1/ Internally-generated funds are essentially composed of depre- ciation allowances, general and special expansion reserves and after-tax profits. The enterprises are permitted to retain these funds to the extent needed to finance the investments included in the Plan. The enterprises' accumulated internally-generated funds are held by the General Organizations and distributed, along with the funds obtained from the central budget (Public Debt Fund), for the projects approved in the Plan. Foreign financing is also channelled through the Public Debt Fund. 9.86 Complete data on the share in investment covered by self-financing and the share financed from the Public Debt Fund are not readily available, as no consolidated accounts for public manufacturing enterprises are compiled. In discussing the sources of funds for public manufacturing investments, it is useful to distinguish between investments in existing enterprises (replace- ment and renewals and relatively minor expansions) and in new projects. Self- financing is used primarily for investment by existing enterprises. Data for the six General Organizations for the five-year period 1971-75 indicate that their after-tax profits were about SL221 million, and their investment expenditures amounted to SL432 million. 2/ Depreciation allowances of some 1/ The Industrial Bank's role is limited mainly to financing the working capital requirements of manufacturing enterprises. It also extends some medium-term loans of up to five years. The Bank's lending rates for Public Enterprises are 5.5 percent for short-term and 6.0 percent for medium-term loans. Private firms are charged an additional percentage point. 2/ For further details, see Volume 3, Annex 3, The Public Manufacturing Sector. - 285 - SL 140 million and some borrowing have filled the gap. 1/ Investments ia new projects, which constituted the bulk of the sector's investment program, were financed almost entirely from the Public Debt Fund and foreign sources. Should the Debt Fund's resources prove inadequate to meet the budgeted invest- ment requirements of the General Organizations, overdrafts from the banking system are authorized. 9.87 Since 1973 Public Debt Fund resources made available to public manu- facturing enterprises (as to all public entities engaged in producing goods and services for sale) have been considered as loans, bearing 9 percent annual interest with repayment beginning after the projects are in full operation. However, since the regulation is of fairly recent origin, it remains to be seen whether the General Organizations and the enterprises will be in a posi- tion to repay borrowed funds and make interest payments (which accumulaite from the date the funds are drawn. Considering their lack of any equity capital and in view of price controls, which may not allow recovery of all recurrent expenditures and the amortization of capital, the new enterprises might find themselves in a particularly difficult position to meet debt service obliga- tions. 9.88 For financing manufacturing investment, private entrepreneurs rely mainly on self-financing from their own funds, including repatriation utnder the new 1973 regulations of capital which flowed out of the country in the 1960s. Their resort to the banking system for term financing is limited, primarily due to their reluctance to disclose their financial position. The Industrial Bank is one of the two institutions which provide term lending for private investors in the manufacturing sector. Its disbursements of medium- term loans to private industry increased from an annual average of SL400,000 (US$100,000) for an average of 16 loans per year in 1971-74 to SL2.7 million for 45 loans in 1975. Its loans seldom exceed SL100,000 and are limited to a maximum maturity of five years. 9.89 The other lending institution for private industry is the Popular Credit Bank (PCB), which caters to artisans and other small-scale enterprises. However, PCB's medium-term lending operations in the industrial sector have tended to be quite limited. PCB loans to small-scale industry averaged 100 in 1973-74. In 1975, the number of loans doubled and the sums involved quadrupled to SL2.1 million. As a result of the government's action i.n late 1974 raising the ceiling on term loans by PCB for industrial purposes from SL50,000 to SL100,000, the average loan to small-scale industry rose from SL4,500 in 1974 to SL10,600 in 1975. Term loans to artisans and small-scale "manufacturing" are usually for three years and are only for equipment. Financial Performance of Public Enterprises 9.90 In the absence of uniform accounting practices by public manufactur- ing enterprises and of consolidated General Organization and sector-wide 1/ The figure of SL140 million excludes depreciation at the sugar raills, for which data are not available. The sugar mills incur massive losses, due to the fact that the price of sugar is fixed at less than 50 percent of production cost. - 286 - financial statements, it is difficult to evaluate the financial performance of the enterprises. 1/ The Government has not undertaken such an evaluation itself. Nevertheless, based on data collected by the mission, which are shown in some detail in Volume 3, Annex 3, an attempt will be made to assess the financial performance of public manufacturing enterprises in recent years. This assessment is necessarily crude and among other things does not take into account the complications resulting from direct subsidy or from hidden subsi- dies such as provision of some inputs to the sector at subsidized prices, or sale of some goods at subsidized prices. Adjusting for subsidies and using shadow prices falls within the domain of evaluation of economic performance, an exercise which does not seem to have been carried out by Syrian authori- ties, and will not be attempted here. 9.91 Instead, net profits of the six General Organizations, which con- stitute the core of the public manufacturing sector, can be approximated by subtracting from gross operating profits the sum of income tax, local taxes, and duties on imported spare parts. Duties on parts are believed to be relatively small and should technically be treated as a recurring expense; gross profits may thus be somewhat overstated, but this does not materially affect the analysis. For the period 1970-75 the net profits, thus calculated, of the six General Organizations were as follows (in million Syrian pounds, a minus sign indicating a loss): General Organization for 1970 1971 1972 1973 1974 1975 Food 4.3 7.0 9.1 8.2 8.9 10.1 Textiles 9.4 9.8 11.5 15.4 19.2 11.5 Chemicals 3.0 3.3 5.4 -16.9 9.4 11.5 Cement 7.8 6.8 5.7 10.4 15.8 10.6 Engineering 7.8 14.6 6.6 17.8 30.9 35.6 Subtotal, sum of above 32.3 41.5 38.3 34.9 84.2 79.3 Sugar -28.3 -15.6 -46.1 -66.9 -120.0 -200.0 Total net profit, public manufacturing 4.0 25.9 -7.8 -32.0 -35.8 -120.7 The net loss for the General Organization for Chemicals in 1973 arose from a SL21.7 million loss incurred by a constituent Public Enterprise, the General Fertilizer Company. 9.92 Due to the large and growing losses incurred by the General Organiza- tion for Sugar beginning in 1972, the overall financial results of the public 11 A uniform accounting code for public economic enterprises was adopted in 1974. However, mainly due to the shortage of trained accountants, it is likely to take several years before the new accounting system becomes fully operational. - 287 - enterprises have been negative since 1972. However, the case of sugar is a special one, which grossly distorts the overall financial performance of Syrian public enterprises. The sugar mills are obliged to sell all their output to the General organization for Consumption 1/ at a price equivalent to less than half of the production cost. 2/ Thus, the accounts of the sugar producing units show massive losses, which are covered by the Ministry of Finance. However, the consumption subsidy 3/ on sugar gets reflected in the accounts of the sugar mill. Because the transfer from the Ministry of Finance is equal to the amount of the loss, the operating results of the sugar mills are eventually financially balanced. Because of this peculiarity of the sugar case, analysis of financial performance of public manufacturing enter- prises in the following paragraphs will exclude the General Organization for Sugar. 9.93 There was considerable variation in the growth of net profits among the various General Organizations during 1970-75, due in part to differential growth in sales. Net profits (loss) as a percentage of sales of manufactures by General Organizations in the years 1970 through 1975 were as follows: General Organization for 1970 1971 1972 1973 1974 1975 Food 4.0 6.1 7.3 5.5 5.8 5.3 Textiles 3.5 3.5 3.6 4.5 4.4 2.5 Chemicals 6.8 6.8 8.5 -20.0 9.0 9.4 Cement 13.3 11.8 9.1 14.3 16.5 9.3 Engineering 18.5 25.6 12.1 24.1 24.3 23.6 Total 6.2 7.4 8.6 4.8 9.1 7.7 In 1973 a loss of SL21.7 million affected the ratio of net profit to sales for the chemical industry and for total public manufacturing. The observed varia- tion in the ratio of profits to sales among the General Organizations may in part be due to the differential average ratios of capital to output. Unfor- tunately, conceptually satisfactory capital stock data are not available. The data available on fixed assets are based on the original cost of acquisition rather than development cost. As many plants, particularly in textiles and cement, are quite old, acquisition cost is unsuitable as a basis for adequate analysis of financial return on investment. There are numerous other factors underlying the observed wide variation in the ratio of profits to sales in a given year or over time, including differences in capacity utilization, the 1/ A public entity responsible for wholesale distribution of a number of staple and other consumption goods. 2/ The retail price of sugar has a dual structure (see Appendix 6A to Chapter 6). 3/ There are subsidy elements in some other manufactures of public enter- prises such as low grade textile fabrics, but the instance of sugar is the most dramatic and conspicuous. - 288 - effects of price controls, the social objectives which the constituent enter- prises are expected to follow, and managerial efficiency. 9.94 What conclusions could be drawn from the data presented on the financial performance of the public manufacturing enterprises? First, it seems that the financial return on sales has not improved over the period 1970-75. The observed increase in the ratio of net profits to sales from 6.2 percent in 1970 to 7.7 percent in 1975 is wholly due to the exceptionally high profits earned by one public enterprise in the General Organization for Engineering, whose main product 'is television sets. The price of television sets is fixed at nearly twice the cost of production. In effect, a luxury tax is imposed on television sales, with the proceeds accruing to the produc- ing unit which, unlike most other public manufacturing enterprises, enjoys exemption from all taxes. With the growing sales of this particular company, the profits of the Engineering General Organization have increased dramatic- ally in recent years. If the television producing firm is excluded, the ratio of net profit to sales for the five General Organizations listed above expe- rienced a slight decline from 5.6 percent in 1970 to 5.2 percent in 1975. 1/ 9.95 The financial performance of some of the General Organizations, particularly the GO for Textiles, appears poor. With sales of over SL 450 million in 1975, the GO for Textiles showed a net profit of SL 11.5 million, or a bare 2.5 percent of sales. This could indicate increasing cost pres- sures on the General Organization, as its operations are particularly labor- intensive, and as indicated earlier, wages have been rising sharply in recent years. The price of some textile products is set at below cost or to include only a low profit margin. 9.96 The second conclusion that emerges from the analysis of profit- ability of public manufacturing enterprises is the inability of most of the enterprises to generate adequate funds for investment, except for limited replacement and capacity expansion (see Volume 3, Annex 3 and Financing of Manufacturing Investment, this Chapter). This implies continued reliance on the budget. 9.97 Finally, the contribution to the central government budget by public enterprises is limited to the taxes they pay, as their modest net profits (together with the depreciation allowances) are barely sufficient to finance investment for replacement, renewal and perhaps minor expansion of capacity. Thus no surplus is generated for transfer to the budget. Data on taxes paid by the General Organizations are incomplete, but available information indi- cates that the four General Organizations for Textiles, Chemicals, Cement and Engineering paid a total of about SL 100 million in taxes over the period 1971-73. 2/ This is indeed modest, given that the total sales of these four 1/ See also Table SA 8B.7. 2/ Despite the fact that income tax rates are fairly steep, tax revenue from public manufacturing enterprises is relatively low. - 289 - General Organizations amounted to SL 1,640 million during 1971-73. 1/ A turn- over tax of 10 percent in lieu of the present taxes would have generated 65 percent more revenue for the budget. 1/ In the years from 1971 through 1973 the sales of these four General Organizations accounted for 80 percent of total sales of all the! General Organizations excluding that for sugar (see Table SA 8B.4). - 290 - CHAPTER 10 PROSPECTS, ISSUES AND OPTIONS IN INDUSTRY 10.01 In the mid-1970s the Syrian Government launched an ambitious program to accelerate the pace of the country's industrial development, diversify its industrial base, and contribute in a significant way to more rapid economic growth and export earning capacity. The ambitious investment goals of the industrialization program had been formulated largely in 1974 and 1975, during the brief period of financial ease engendered by the 1973 increase in petroleum revenues and the subsequent improved access to Arab grants and Communist and Western credits. The bulk of development spending envisaged by the program was for projects conceived and initiated in the last two or three years of the Third Five-Year Plan 1971-75 and carried over to the next Plan period for completion. 10.02 Thus, although the draft of the Fourth Five-Year Plan 1976-1980 had not been approved or made public by the end of 1976, much of the project com- position of its development program for the industry sector had been determined and the accompanying objectives and strategy identified. In manufacturing, the Plan aims for rapid replacement of imports of such consumer goods as textiles, such intermediate inputs as fertilizers, steel billets, and glass and even, on a more modest scale, of capital goods (tractors and other agricultural imple- ments). In addition, for the first time since the introduction of development planning in Syria, export promotion on a relatively large scale has been made an important element of industrialization policy and planning. The development of export-oriented industry is to be concentrated on product lines that are essentially resource-based (cotton yarn and phosphate fertilizer) or partially so (cement). It is also hoped that Syria can become an exporter of light engineering goods (initially, consumer durables), for which it lacks material resources but possesses a relatively abundant and potentially trainable, albeit unskilled, labor force. 10.03 In mining, Syria is expected to continue its efforts to develop its petroleum and phosphate resources. The major development approaches for petro- leum are to continue with geological and geophysical surveys and prospecting drilling; to further develop existing fields; to increase refining capacity; and to initiate steps for commercial exploitation of gases associated with petroleum. The production of phosphates is expected to more than double by 1980, through expansion of capacity at existing mines and the addition of a new plant. The expected additional output of phosphates is intended for local processing into fertilizer. PUBLIC MANUFACTURING INVESTMENT IN THE FOURTH PLAN 1976-1980 10.04 No information was available in 1977 on the role envisaged for private manufacturing during the Fourth Plan period; the Plan document This chapter draws upon the work of Messrs. J. Khalilzadeh-Shirazi and Bernard Decaux (Consultant). - 291 - included only a small indicative target for private manufacturing invest:ment for 1976-1980. The emphasis was on public investment in manufacturing, allo- cated as much as 20 percent of total public development expenditure projected in the Plan. Because approval and publication of the Fourth Plan were delayed, and the Plan itself was subsequently shelved, the analysis that follows is based upon the investment plans of the individual General Organizations, as approved by the Minister of Industry, which were submitted to the State Planning Commission. 10.05 The proposed investment program in public manufacturing amounted to about.SL 8.8 billion (see Table 10.1). This sum excluded allocations, believed to be relatively minor, for certain industries that do not come under the Ministry of Industry. 1/ It also excluded the allocation of SL 2.0 billion Table 10.1: PROPOSED INVESTMENT IN PUBLIC MANUFACTURING INDUSTRY, 1976-80 /a (SL Millions) /b (A) (B) (C) (D) Renewal & Transferred New Total of Reserve Subsector Replacement Projects Projects A & B & C Projects Food Processing 49.9 83.7 25.6 160.1 135.0 Sugar 42.0 698.0 1.0 741.0 - Textiles 165.0 1,029.0 14.0 1,208.0 239.0 Chemicals 60.0 2,828.0 558.0 3,446.2 554.5 Engineering /c 60.0 618.1 20.0 698.1 641.5 Cement 21.0 1,074.5 1,475.0 2,570.5 462.0 Total 397.9 6,331.5 2,094.5 8,823.9 2,032.0 /a Excludes proposed investments by the Authority for Cereals in Flour Mills; Cotton Ginning and Marketing; and the Tobacco Monopoly, which are not attached to the Ministry of Industry. /b Available data do not indicate whether the proposed investments are in 1975 prices or are comprised of constant 1975 and current prices. /c Excludes proposed investment of SL 150 million by the Euphrates Company for Tractors, an independent public sector company not attached to the General Organization for Engineering Industries, but under the super- vision of the Minister of Industry. Source: Ministry of Industry and the General Organizations. 1/ Flour milling (under the Authority for Cereals); tobacco manufacture (under the Tobacco Monopoly); and cotton ginning and marketing. - 292 - for reserve projects (projects to be implemented only if financing should later become available). For the purpose of analysis in this report the proposed investment in reserve projects is disregarded, as the likelihood of their implementation during the Plan period appears slim. 10.06 Of the SL 8.8 billion, about 4 percent is for renewal and replace- ment of existing capital equipment, 24 percent for new projects, and 72 percent for so-called transferred projects which, as explained in the last Chapter (Table 9.6), were added to the revised target of the Third Five-Year Plan in its last years, after the financial situation temporarily eased. Most of the transferred projects had been contracted for and started in 1974 or 1975. Because the transferred projects loom so large in the sector's investment program and because contract and down-payment commitments have already been made for many of the new projects, there is little scope for substantially altering the size and composition of the manufacturing investment program. in view of the financial difficulties faced by Syria in 1977, the new projects and even some of the transferred projects which have not reached the physical implementation stage may be delayed until the next Plan period (1981-85), but the core of projects to be executed is likely to remain substantially intact. Hence, the substance of the analysis that follows may be only marginally affected by Government decisions which are expected in 1978. 10.07 The branches of manufacturing most heavily emphasized in the pro- gram are chemicals and cement, which together account for about 70 percent of the proposed investments. This reflects sizeable investments in projects for cement and in fertilizer projects to include one plant for ammonium-urea and two for tri-superphosphate (TSP). 1/ The cement and fertilizer projects, which claim about one-half of the sector's proposed investments, are intended both to replace imports and to boost exports. Major projects of the General Organization for Chemicals include, in addition to the fertilizer plants, a plant for bicycle and automobile tires, a pulp and paper mill, and two glass factories, all intended to meet the projected requirements of the domestic market. 10.08 The textile branch ranks third after chemicals and cement in terms of proposed investment outlay. The main feature of its development program is a massive expansion of spinning capacity, from 285,000 spindles in 1975 to 735,000 spindles in 1980. The objective is progressively to replace cotton exports by exports of cotton yarn. 2/ No expansion of weaving capacity is 1/ In early 1978, the Government was giving serious consideration to the cancellation of the TSP plant proposed for Deir-ez-Zor. In fact in 1979 the Government deferred the project. For details on the composition, estimated cost, and output targets of projects for the various branches of public manufacturing, see Volume 3, Annex 3. 2/ In 1975, about 25 percent of Syria's cotton output was processed into cot- ton yarn; the proposed expansion of spinning capacity aims at processing into yarn 75 percent of the expected cotton output by 1980. - 293 - envisaged; instead the production plan calls for increasing fabric output by improving capacity utilization and productivity. I/ 10.09 Other major manufacturing projects include four new sugar mills with a combined output capacity of 240,000 tons of refined sugar. This would require an input of ten times the 1975 crop of sugar beet, for which drama- tically expanded acreage and production is planned in the coming years. Only limited investment (less than 2 percent of the overall manufacturing target) is allocated for other food-processing industries. 10.10 In engineering goods, the thrust of the proposed investments is to expand capacity for assembly of (and to a modest extent production of com- ponents for) consumer durables such as refrigerators and television sets, and to introduce backward-linkage integration in steel bar production by the erection of a scrap-melting plant for production of billets. Factories for production of metal pipes, aluminium frames, and cables are among the other relatively important projects of the subsector. INVESTMENT IMPLEMENTATION CONSTRAINTS 10.11 The details of financing of-the proposed Fourth Plan investment program for the public manufacturing sector were not available to the mission. In 1976 self-financing budgeted by the six General Organizations in manufac- turing was to provide only about 6 percent of their proposed investment expenditure of SL 1.9 billion. The amount of self-financing actually realized may have been even less (Volume 3, Annex 3). Although there is substantial variation in the ability of the individual General Organizations to finance expansion and new projects in the industries under their umbrellas, it is likely that internally-generated funds will provide considerably less than 10 percent of proposed investment in public manufacturing over the Plan period. Those funds would be sufficient to cover renewal and replacement investments and a portion of the expansion program of the existing enterprises. Thus, it is likely that well over 90 percent of the proposed investments will have to be financed from the central budget (Public Debt Fund) and from external sources. 10.12 For many of the proposed projects (transferred and new), partial foreign exchange financing has been arranged through suppliers' credits and bilateral economic agreements. In a few instances, loans or grants from neighboring oil-exporting countries have been arranged (Saudi Arabia, for instance, is financing the scrap-melting plant). However, financing gaps remain for both local currency costs and foreign exchange costs. Unless addi- tional external resources are found to cover such gaps, they would have to be met by the Public Debt Fund and thus put a heavy strain on general budget revenues. Given the likely budgetary and balance of payments pressures, financial constraints could cause delays in the implementation of the sector's investment program. 1/ See Volume 3, Annex 3 for further details. - 294 - 10.13 The sector faces other constraints on project implementation, par- ticularly in view of the limited availability of technical expertise and materials. To alleviate the former problem, the General Organizations have resorted extensively to turn-key contracts. Substantial bottlenecks never- theless remain. Skilled labor and building materials (such as cement) are in short supply; the ports are congested; the scarce managerial and tech- nical resources of the General Organizations--entrusted with responsibility for the implementation of new projects on top of their functions for existing enterprises--are overtaxed. Thus, potentially costly delays in project implementation could be experienced due to the amalgam of financial, human and physical constraints facing the sector and the economy as a whole 1/. MEDIUM-TERM GROWTH PROSPECTS 10.14 The draft Fourth Plan set a growth target for the 1976-80 period of 15.4 percent a year in industry (mining, manufacturing and electricity, but not construction). Hence, real value added in industry would more than double between 1975 and 1980. Separate growth targets for mining, manufacturing, and power were not specified. In the mining sector, the output of crude petroleum was expected to peak at around 10 million tons a year--roughly its 1975 level. Crude oil production is therefore not likely to contribute to industrial growth during the Plan period. 2/ Phosphate production is expected to rise from 860,000 metric tons in 1975 to about 2 million tons in 1980; but phosphates and electricity combined account for less than 10 percent of value added in the industry sector (1975). It is therefore clear that if industry's target growth rate of 15.4 percent is to be realized, the Syrian planners must expect value added in manufacturing to grow at a substantially higher rate. 10.15 Table 10.2 shows the Fourth Plan production targets for key manu- factured goods in 1980, for the public manufacturing sector. As may be observed, the output of most items, whether traditional or nontraditional, consumer goods or intermediate input, was to increase sharply over the Plan period, largely as a result of the investment program to be completed. 1/ This is not, of course, to say that all projects will experience imple- mentation delays; indeed some are ahead of schedule. The spinning mill in Homs, for example, was in operation a year earlier than expected. 2/ Even if the extensive prospecting and exploratory activity underway in 1977 should lead to discovery of new fields, they could not be developed in time to increase crude oil output by 1980. - 295 - Table 10.2: PRODUCTION OF SELECTED KEY MANUFACTURED GOODS 1975 (ACTUAL) and 1980 (TARGET) Preliminary 'Actual Target Unit 1975 1980 Cotton yarn Thousand Tons 32 114,pa= /a Cotton silk fabrics Thousand Tons 15 22 Cables Thousand Tons 6 36 Refrigerators Thousands 50 200 Television sets Thousands 39 250 Billets Thousand Tons Nil 100 Tractors Thousands 6 20 Cement Thousand Tons 1,000 1,500 Nitrogenous fertilizer Thousand Tons 86 450 Phosphatic fertilizers Thousand Tons Nil 700 Glass and glass products Thousand 19 103 Paper Thousand Tons Nil 60 Sugar Thousand Tons 117 275 Vegetable oil Thousand Tons 22 35 /a Including 30,000 tons to be used in public sector textile mills. Source: Statistical Abstract of Syria, 1976 for the 1975 data, and the State Planning Commission, Draft Fourth Five-Year Plan for Industrx, for the 1980 targets. 10.16 The production targets set for the public manufacturing sector in the Fourth Plan appear ambitious. They are predicated on timely implementa- tion of the projects, full capacity utilization of the plants that come on- stream and improved capacity utilization in the existing plants. Achievement of the production targets may be difficult in view of constraints to imple- mentation of the projects, bottlenecks in operating the new (and the old) plants efficiently, and the demand conditions. A few illustrations Erom the various branches will serve to explain the points raised above. 10.17 (i) Textiles. The planned increase in the production of cotton yarn from its 1975 level of 32,000 tons to 114,000 tons by 1980, requires the installation of nearly 500,000 new spindles (as compared to 290,000 spindles in operation in 1975). Even assuming that the additional capacity is installed according to schedule, the staffing of the new plants with experienced workers is likely to be a major problem. For some of the pro- posed spinning mills that will be located in traditionally nonindustrial areas, the recruitment of spinners and particularly supervisory staff may be even more difficult. At present, the technical management of some of the existing mills is entrusted to foreign staff, indicating the difficulty of finding experienced Syrian technicians and engineers. - 296 - 10.18 (ii) Cement. The planned increase in cement capacity from about one million tons in 1975 to 5.5 million tons in 1980 and some 8 million tons in 1982 was primarily intended to meet the existing acute shortage in 1975 (estimated to have been almost 1.3 million tons) and the rapidly growing domestic demand engendered by the acceleration of development efforts. The Government's forecast of the demand for cement in 1980 is about 4 million tons (Table SA8A.ll). Therefore, should all the proposed plants be built, even if they are delayed in coming on-stream, Syria would have a substantial exportable surplus in the early 1980s, for which export markets would have to be found. 10.19 (iii) Fertilizers. The envisaged expansion of output in nitrogenous and phosphatic fertilizers by 1980 is expected to result from the addition of three plants (two of which are already under construction) to the existing plant at Homs. Assuming that the implementation of new fertilizer plants proceeds as planned -and -the operating performance of the new plants is markedly better than that of the existing one, so that full capacity utilization would not be impeded on technical grounds, demand factors may prove to be a major obstacle to the growth of the industry. The production capacity of the new plants will exceed the domestic demand by a wide margin in the early to mid- 1980s, 1/ and a substantial portion of-the output will have to be exported. Since the international export market for fertilizers is highly competitive, Syria may have difficulty in exporting its fertilizer surplus. In this event it would be unable to attain the rapid growth envisaged as much as it was to be generated by the chemical industry, to which some 25 percent of the sector's planned investments were allotted. 10.20 (iv) Sugar. The planned production target of 275,000 tons in 1980 is partly predicated on the basis of the addition of four new sugar mills which will require as raw material an estimated 1.9 million tons of sugar beet annually. The sugar beet output in 1975 was only about 10 percent of this quantity. 2/ Thus, significant and rapid expansion of acreage (and increased productivity) in sugar beet growing would be required to enable the existing and new plants to reach the planned output level by 1980 and to attain full capacity utilization thereafter. However, whether it is an economic proposi- tion to use irrigated land for growing sugarbeet instead of cotton is in itself an issue which does not seem to have received systematic attention by Syrian planners. 3/ 1/ Production capacity for P 20 is 1982 is expected to be 200,000 tons while domestic demand is n likely to exceed 40,000 tons. The pro- jected exportable surplus of ammonium nitrate in 1982 is 85,000 tons (N) as compared to anticipated production of 350,000 tons (N). See Volume 3, Annex 3. 2/ Sugarbeet output in 1975 was about 18 percent below its 1970 level. 3/ Chapter 8 analyzes this question. - 297 - 10.21 (v) Engineering Goods. In consumer durables, assembly of te'levision sets is planned to increase from 39,000 units in 1975 to 250,000 units in 1980. As the assembling process is fairly simple, the planned output for 1980 could be achieved, if adequate markets can be found. A production capacity of 250,000 sets per year would exceed the size of the domestic market, since as noted earlier, of the 39,000 sets produced in 1975, only 29,000 sets were sold domestically and there were no exports of television sets. Again, as in the case of fertilizers, export outlets would have to be found to support the planned output target for television sets--a task which may prove difficult, particularly given the competitive nature of the international market. 10.22 In summary, the prospects for growth in public manufacturing during the Fourth Plan period depend essentially on the pace of project implementa- tion and on efficiency in the utilization of the existing production capacity and of the new capacity. These in turn depend on a host of factors, including the availability of financial resources, managerial and skilled manpower and raw materials; improvements in the management of public enterprises; and ulti- mately on demand conditions. The most promising growth potential in public manufacturing would seem to lie in the textiles and cement subsectors. Despite probable difficulties in meeting the 1980 targets for most key manufactures, the planned public manufacturing investments should result in substantially higher growth during the Fourth Plan period than in recent years and in the broadening of the country's manufacturing base. 10.23 The prospects for investment and growth in private sector industry are difficult to assess. In recent years private industry has shown consider- able dynamism, albeit circumspectly. Whether in future private entrepreneurs will channel substantial resources into industrial investment will depend largely on the progress in government policies designed to encourage private manufacturing investment. There is a need for clarification of the respective roles of the public and private subsectors and provision of safeguards for private investment. This would help to create more confidence among private entrepreneurs, and elicit greater response on their part to the prospect of more active participation in Syria's industrial development. Employment Generating Effect of Planned Investments 10.24 The manufacturing investments to be undertaken by the public sector during the Fourth Plan period are expected to generate about 33,000 new jobs, at a rough estimate. Some 50 percent of the employment opportunities are expected to be in the textile subsector. Based on the target investment of SL 8.8 billion (minus the SL 0.4 billion replacement and renewal alLocation) the estimated average investment cost of job creation would be more than SL 260,000 ($66,000) 1/. The indirect employment effects of the planned public 1/ This average figure should be considered as an order of magnitude. One particular problem associated with this estimate is worth mentioning. The cost of the proposed projects is higher than the investment alloca- tions for the Fourth Plan period; thus the estimated cost per job is somewhat higher than that indicated here. - 298 - manufacturing investments cannot be quantified. It would seem that the direct employment effect of the proposed investments is relatively small, considering the magnitude of the investment program and the country's need for creating non-farm employment. 10.25 The relatively small impact of the Fourth Plan manufacturing projects in creating employment opportunities stems largely from the type of industries to be developed as well as the choice of technology within given industries. It would seem that in the formulation of the proposed investment package for the sector, employment generation has been relegated to a secondary role. Export Outlook 10.26 As noted earlier, one of the primary objectives of the Fourth Plan investment program for the manufacturing sector is to increase the exports of manufactures, which have hitherto contributed relatively little to the coun- try's export earnings. Manufactured exports should grow substantially over the next few years with the anticipated surpluses in textile products, mostly cotton yarn, a line in which Syria has comparative advantage. 10.27 The production plan of the General Organization for Textiles calls for increasing the share of exports in its output to 45 percent in 1980 from 10 percent in 1975. This target may be high in relation to available produc- tion capacity, but substantial growth can be expected as Syria's cotton yarn cost seems internationally competitive, and is expected to be allowed duty- free entry into the European market under the recently signed agreement with the EEC. Moreover, yarn export is relatively simple in view of the ease of complying with the specifications desired by potential buyers. In contrast, export of fabrics is difficult as compliance with product characteristics defined by potential customers requires considerable (and timely) flexibility. Nevertheless, the public sector may be expected to triple fabric exports be- tween the low 1975 level and 1980. These exports would be primarily for the Eastern European and Arab countries' in which Syria already had an established market and Syrian fabrics are known and competitive. Penetration of new mar- kets, particularly the EEC, will be more difficult, although the preferential treatment that will be accorded to Syrian fabrics should facilitate exporta- tion. Syria's grey cloth is competitive with French production costs. For printed fabrics, the private sector may be in a better position to compete in quality as it appears more adept in discerning and responding to changing patterns of demand. 10.28 It is also hoped that Syria can export a major portion of its output of both ammonium-urea and fertilizers, and TSP when the new plants come on- stream. As noted earlier, a major portion of the country's fertilizer output, particularly phosphatics, would be available for export in the early 1980s. This is likely to be a major problem in view of the heavy competition that is expected to prevail in that export market in the area and in Europe at that time. Although Syrian authorities-believe that fertilizer could be exported to neighboring Arab countries, no negotiations on export contracts have been undertaken. 299 - 10.29 Syria has had little success in exporting assembled engineer-Lng goods such as television sets and refrigerators. Despite available capacity in these and other product lines, exports of the General Organization for Engineering Industries were virtually nil in 1975, as compared to 4 percent of its total sales in 1970. As the product lines produced by the subsector have counterparts in neighboring countries, the potential for developing exports in the future seems weak. In any event, these products have relatively small value added content. 10.30 A potentially promising, but modest, area of increasing exports is in food processing. Exports of vegetable oil and cotton linters could be increased through the expansion of capacity, which is underway. Exports of processed vegetables (such as tomatoes) and canned fruits could also be increased. Expansion of exports of these products will, however, require an increasing and uninterrupted supply of raw materials. The exports of pro- cessed food are thus closely linked with the performance of agriculture. Accordingly, close coordination in planning with the agricultural sector is needed. 10.31 Syria's export potential for cement is highly dependent: on finding markets in the area. Assessment of supply and demand conditions for cement in the Middle East is urgently needed to underpin Syria's hope to be a major exporter of cement in the early 1980s. Syria's current cemaent production cost 1/ is well below the prices it pays for imported cement. 2/ However, a study of the long-term prospects in the cement industry in the region and the competitiveness of Syria's production cost from the new plants is needed to determine whether cement should become a major export product on economic and financial grounds. OBJECTIVES AND STRATEGY: SOME OBSERVATIONS AND RECOMMENDATIONS 10.32 Syria's manufacturing development objective in the medium term, as can be gleaned from the proposed project content of the Fourth Plan, is to accelerate growth of the sector and to diversify its base. Priority is given to developing industries that process domestic raw materials for the domestic market or for export. The heavy concentration of investment funds on the textile, cement, fertilizer and sugar industries is a clear indication of this strategy. A particularly new departure in the proposed investment pro- gram for public manufacturing industry is its emphasis on export-oriented industries. 1/ Ex-factory production cost (defined in the accounting sense) of cement in 1975 was about SL 60 ($15) per ton. However, this production cost is that of the old plants which have been essentially fully depreciated. Moreover, it is believed that fuel, a major cost element in cement pro- duction, is supplied to the plants at prices well below the world market prices. The estimated cost of production from the new plants is not known. 2/ The cif price of imported cement in 1976 was about $35 per ton and expected to be $41-$42 per ton. - 300 - 10.33 Because of weaknesses in industrial planning, project identification and evaluation apparatus (discussed below), the proposed investment program cannot be expected to be sound in all respects. Considerable groundwork is needed before various objectives and strategies can be adequately discussed and evaluated and choices made that will fit into the broader context of the country's social and economic objectives. 10.34 The objective of developing and expanding resource-based industries to achieve self-sufficiency and/or export earnings, which is the underpinning of the proposed investment program, is sound. However, it is not one that can be pursued simplistically. Syria's advantage in good quality cotton and rela- tively abundant labor supply justifies the expansion of its spinning industry, particularly since the export prospects for cotton yarn are quite promising. Expansion of the cement industry, at a time when Syria faces an acute shortage of cement, is also quite sound, as an objective. However, the expansion plan for cement over the Fourth Plan period implies cement exports on a sizeable scale by the early 1980s, and the availability of markets for, and the eco- nomic justification of, exporting cement have yet to be established. 10.35 Another resource-based industry which is being developed on a rela- tively large scale--fertilizers--raises the same issue. Under reasonable assumptions for growth of internal demand, the planned production capacity would be substantially in excess of local consumption in the early 1980s. Given the low quality of its phosphate rock, however, it remains to be demon- strated that Syria could have a comparative advantage in phosphatic fertil- izers, particularly as the output will have to be mainly exported. 10.36 The building of four new sugar mills to process sugarbeet is another case where the desire to develop resource-based industries and to attain self-sufficienc-y may have been carried too far. As noted earlier, the availability of sugarbeet to meet the combined requirements of the new and existing mills will be a major problem. A 95 percent increase in the price of sugarbeet between 1970 and 1975 1/ does not seem to have elicited a positive supply response on the part of farmers. Cotton and sugarbeet are competing crops (in terms of claim on irrigated land), but the former is a well-established crop while sugarbeet is a relatively new crop in Syria's agriculture. Even assuming that price is the most important variable in supply response, increasing the price of sugarbeet relative to that of cot- ton in order to increase the sugarbeet supply may not be a feasible solu- tion; plans for the textile industry depend heavily on an expanding supply of domestically-grown cotton which has also been an important export earner. Thus, the required expansion of sugarbeet production would have to be attained primarily by expanding total acreage under irrigation (see Chapter 8). Syrian authorities believe that it would take at least four years after completion of each mill to reach full production. This may be an 1/ The price increase in cotton was less than half of this. Both cotton and sugarbeet are purchased by the Government. - 301 - overoptimistic estimate, given the supply difficulties just noted. Moreover, even if full production could be reached, the domestic demand for sugar in the early 1980s is unlikely to be sufficient to absorb the output. Size of the Investment Program 10.37 The above discussion also raises the question of whether the manu- facturing investment program is too large. If the projected costs of some of the projects (those for fertilizer, sugar, and possibly cement) are not justi- fied by demand conditions and/or raw material availability, then the proposed allocation for the sector could be significantly reduced. No other projects requiring investments of comparable size but having sound economic justifica- tion readily offer themselves as substitutes. The issue of possible overallo- cation of investment funds to public manufacturing industry would, of course, need to be examined in the context of sectoral balance of the investments. Choice of Factor Proportions 10.38 The choice of factor proportions in manufacturing industry is, of course, very much influenced by the choice of industries to be developed. Cement, fertilizers, sugar, and the scrap-melting plant--to cite a few-- apparently offer limited scope for efficient factor substitution. More than 50 percent of the public manufacturing sector's planned investments during 1976-80 are for industries which are of an inherently capital-intensive type. The average investment cost of job creation in the proposed cement, fertil- izer, and sugar plants is in the order of SL 745,000 ($187,000) per worker.l/ 10.39 In cotton textiles, where opportunities for efficient factor sub- stitution appear to be substantial, according to a UN study,2/ the average investment per worker -in spinning during the Fourth Plan is about SL 65,000 ($16,000). It is as high as SL 140,000 ($35,000) in one of the proposed spinning plants.3/ 10.40 Given the reported feasibility of efficient factor substitution, the prevalent underutilization of labor in existing mills, and the scarcity of capital relative to labor in Syria, a more labor-intensive choice of factor proportions would seem to have been an appropriate strategy for expanding pro- duction capacity in the textile industry. 1/ Based on estimated investment cost of SL 4.4 billion and 5,900 employment opportunities. The investment per worker in the scrap-melting plant (with an estimated cost of SL 215 million) is about SL 640,000; in the metal pipe plant (with an estimated cost of SL 158 million) it iis about SL 1.5 million. 2/ $6,600 to $21,500 investment per worker. United Nations Industrial Development Organization (UNIDO), Textile Industry Monograph No. 7, (Vienna, 1969) p. 44. 3/ At the plant in Idleb, which is to have 15,000 open-end spindles. - 302 - 10.41 Only in the assembly operations in the engineering industry is employment creation expected to be achieved at a relatively low investment outlay per worker. But for the manufacturing sector as a whole, employment generation seems to have been a secondary consideration in investment deci- sions. Possibly other development objectives, including the desire to achieve more rapid growth and savings, may have influenced the decision to rely on capital-intensive industries and technologies. However, it would seem that in the long run, Syria's industrial development strategy needs to include par- ticular emphasis on creating employment opportunities. Recommendations on Strategy 10.42 The foregoing analysis and the mission's observations in the field have suggested some possible strategies to reconcile pursuit of Syria's social and economic objectives with its potential and the constraints facing it. The following recommendations, some with immediate implications and others of longer-term interest, are therefore offered: (i) Delay implementation of certain projects The tri-superphosphate project at Deir-Ez-Zor, construction of which has not yet begun, should be delayed until export prospects, including potential markets and the competitive- ness of Syria's fertilizers have been carefully studied. 1/ The construction of the sugar mills should be delayed and phased in such a manner that availability of sugarbeet could be reasonably assured (see also Chapter 8, para. 8.78). Three cement mills (with a combined annual production capacity of 2.2 million tons), not yet contracted for, should be delayed until a study of the supply and demand conditions in the Middle East have been completed and export prospects assessed. Investment oppor- tunities in alternative construction materials (such as gypsum- based products and bricks of both sand lime and red clay) should be explored. These could prove efficient substitutes for cement requiring lower capital outlay (Volume 3, Annex 3). (ii) Increase allocations for renewal and replacement Many plants, particularly in food processing and textiles, are old and need renewal and replacement. The proposed allocation for this purpose (SL 400 million over the five- year period), is inadequate. 2/ Increased investment in the plants in need of modernization could increase output at a lower cost than through building new capacity. A careful survey to determine the rehabilitation investment require- ments of the sector is needed. 1/ In 1979, the Government deferred the Deir-Ez-Zor TSP project. 2/ On this issue, see Volume 3, Annex 3 on the General Organization for Food Industries. - 303 - (iii) Increase capacity utilization and productivity in existing enterprises Considerable growth of output and value added could be achieved by increasing capacity utilization and produc- tivity in most plants. Relatively minor investments an spare part and supply inventories, standby equipment (par- ticularly for power) and balancing equipment could yield significant returns. The study of capacity utilization in the sector being conducted by the State Planning Commission in 1977 should result in a comprehensive action program for augmenting growth from the existing plants. Productivity incentives need to be introduced, possibly along, the lines outlined below. (iv) Urgently explore export markets Contracts, including bilateral trade agreements, need to be arranged in advance to ensure export outlets for the output of the proposed two fertilizer plants. Considera- tion also needs to be given to introducing, after a careful study, an export incentive system for the manufacturing sector. (v) Step up training programs The investments proposed will require a substantially increased supply of skilled production workers, super- visory staff, accountants and other support personnel. The present training programs need to be expanded to augment the supply of skilled manpower. (vi) Promote small-scale enterprises Given the heavy emphasis of the proposed investment program on large-scale and capital-intensive projects with their small employment generation impact, any future strategy of industrial development in Syria must pay particular attention to the development of small-scale enterprises, which usually have higher employment impact per unit of investment outlay than large-scale manufacturing. Subcontracting to the private sector by public enterprises could be one way of achieving the objective of development of small-scale enterprises. - 304 - (vii) Stimulate efficiency Given Syria's highly protected market and the virtual absence of effective domestic competition, consideration should be given to providing methods for stimulating effi- ciency. Linking remuneration of workers and management to performance would be one method. Competition between the public and private enterprises, hitherto discouraged, may also be considered as a possible method, which however may have limited effectiveness. After a careful study, the tariff and other protection measures could be gradually relaxed to introduce external competition as a dynamic device for stimulating efficiency. (viii) Promote foreign investment There has hitherto been little participation of foreign firms in Syrian industry. A foreign investment code is needed that would be designed to encourage foreign investment in partnership with the public and/or private sectors in specific lines of industry. -This would not only promote the inflow of foreign capital and technical knowhow, but also assist Syria's export promotion efforts. Possibilities of sub-contracting arrangements with international firms should be explored. Syria's relatively abundant and inexpen- sive labor and proximity to the sea would seem conducive to attracting subcontracting manufacturing activities. (ix) Initiate a domestic resource cost study To help determine the direction of future manufacturing investment, a study of the domestic resource cost of dif- ferent lines of manufacturing activity would be advisable. The domestic inputs would be evaluated at international prices. Such a study could indicate more clearly the areas in which Syria possesses comparative advantage and provide guidance for project selection in the future. INDUSTRIAL PLANNING 10.43 Syria subscribes to central planning and Ba'athist socialist prin- ciples. The five-year and annual plans are the main instruments for articu- lating and implementing the economic and social objectives of the Government. The State Planning Commission (SPC) is the agency responsible for formulating the five-year and annual plans, based on the directives of the political leadership and the plans submitted by the various ministries and independent public entities. The draft Plan, as prepared by the SPC, is submitted to the Supreme Planning Council, which is chaired by the Prime Minister and composed of the Ministers, the Governor of the Central Bank, the Director General of the CBS, the Head of the Union of Labor, and the Head of the Union of Farmers. The Supreme Planning Council's approval of the Plan is necessary before it is formally adopted. - 305 - 10.44 For the public manufacturing sector, the principal production targets are established by the small staff of the Industrial Planning Department of the SPC, on the basis of demand forecasts prepared by another unit of the SPC. Means for fulfilling the estimated demand requirements are proposed by the Industrial Planning Department, taking into account existing capacity and the projects already under implementation. 1/ After this step, the Ministry of Industry and Liie General Organizations are requested to comment on planned targets and to make proposals for investments in individual projects. 10.45 The detailed preparation of plans is thus left to the General Organizations. The General Organizations prepare project lists for inclusion in the Five-Year Plan. Annual plans are also prepared by the Organizations. The Five-Year Plans and the annual plans are then transmitted to the Ministry of Industry, where its Directorate for Planning, Statistics and Economic Affairs reviews and discusses the individual General Organization's plans before transmitting them to the SPC. 10.46 The Ministry of Industry seems to lack the staff capacity to under- take a thorough evaluation of the plans proposed by the General Organizations in order to ensure adequate project preparation, to coordinate proposed invest- ments for consistency within and among branches of manufacturing, and to evaluate the realism of the targets in light of known constraints (particularly on skilled manpower). The Ministry does not carry out any basic research on industrial issues which would enable it to evaluate and screen the projects proposed by the General Organizations and suggest, if necessary, alternative projects or modifications in the projects. Consequently, the Ministry is not in a position to provide a priority ranking of the project proposals of the General Organizations, nor can it make decisions and recommendations, based on sound economic benefit-cost analysis, on the investment priorities in the sector. Under these circumstances, the role of the Ministry of Industry in formulating industrial development policy and strategy is limited. It there- fore acts mainly as a conduit for the transmittal of the individual General Organization's plans (the quality of which varies widely) to the SPC. 10.47 Feasibility studies have to be prepared by General OrganizatioDns on the basis of project ideas sometimes originating from the SPC and sometimes from the Organization or the operating unit itself. Such studies should in principle be justified not only financially but also economically. An eco- nomic evaluation manual (following the UNIDO project evaluation methodology) has been given to the Organizations and should also theoretically be used by the SPC's Industrial Planning Department; however this is not done in practice, again due to lack of specialized staff at all levels. The planning sections' work in the Organizations is of uneven quality and staff is limited to 4 or 5. 11 Knowledge is insufficient, particularly within the SPC, not only about theoretical but also effective existing capacity in producing units. A special committee has been set up to review this problem through plant visits. -. 306 - In recent years, a host of new industrial projects have been decided upon without proper analysis and screening of feasibility studies (where there was one). The SPC's role in the investment decision-making process should go beyond checking whether the production expected from the proposed projects would meet the targets it had originally set and given to the General Organiza- tions, and in formulating the production targets, the SPC's effectiveness needs to be strengthened both by addition of manpower and by adoption of improved methodology required for material planning in a centrally planned socialist economy. 10.48 The choice of projects is therefore largely left to the discretion of the General Organizations. This choice is only weakly controlled by the central agencies (the Ministry of Industry and SPC). Hence as the system has thus far operated, the General Organizations seem to be the pivotal point in investment and resource allocation for public manufacturing industry. MANAGEMENT AND FINANCING OF PUBLIC MANUFACTURING ENTERPRISES 10.49 Syrian public economic enterprises, including those in the manufac- turing sector, are expected to serve a multiplicity of objectives, among which are the following: to contribute to the growth of output; to supply goods at stable prices; to provide employment opportunities; and to be efficient and enhance productivity. That certain inherent conflicts are generally present in the objectives to be served by public enterprises in particular, as they are more susceptible to political pressures and constraints than the private sector, hardly needs elaboration. Ideally, the institutional framework and organizational setup should: (i) signal explicitly the objectives formulated by top-level government decision-makers to the management of public sector enterprises; (ii) make explicit and, to the extent feasible, minimize the costs of resolving trade-offs among the various objectives to be served by the enterprises; (iii) establish a rational system of incentives for managers and workers to respond to economic and social objectives; and (iv) provide for control and public accountability of the enterprises. 10.50 Broadly, there are two interwoven aspects to the institutional and organizational problems facing Syria's public manufacturing sector. First, the sector suffers from the fact that the General Organizations are powerful entities, which often initiate projects for inclusion in the Plan without proper evaluation and exercise tight control over the constituent enterprises. The Ministry of Industry and the SPC (as well as the Ministry of Finance) have by law substantial responsibility for public economic entities, but do not seem to have the staff capacity to monitor the General Organizations. The General Organizations can, and usually do, act as fairly autonomous entities, notwithstanding the regulations and various directives, and seem to be subject to insufficient public accountability in terms of efficient utilization of the resources put at their disposal. The absence of adequate institutional safeguards, including well-designed targets and a system of rewards for over- fulfillment and penalties for underfulfillment of those targets, exacerbates the problem of monitoring the performance of the General Organizations. In connection with the role of the General Organizations, it is important to - 307 - note that although the Plan targets appear to be handed down as objectives that have to be carried out by the General Organizations, those targets have often been unduly influenced by their General Directors. These managers, although somewhat constrained by higher authorities, may also pursue the objective of expanding their own spheres of influence--which in the Syrian environment, as in many others, is measured by the number and size of the projects undertaken and the quantity of output produced--without due regard for efficiency in terms of resource allocation and utilization in the economy as a whole. The nature of the available financing mechanisms for public sector industry aggravates the problem. The present system of drawing primarily on allocations from the Ministry of Finance (the Public Debt Fund) and foreign loans (largely suppliers' credit) for financing industrial proj- ects is not conducive to efficient resource allocation and sound public accountability, as the prevailing planning and monitoring institutions only weakly safeguard against inefficient resource allocation and use. 10.51 The second problem, concomitant to that of the role of the General Organizations, is the degree of decentralization of decision-making at the enterprise level. It does not seem that individual enterprises have the degree of autonomy conducive to fostering managerial initiative and enhancing plant efficiency. Under the present system, enterprise managers must refer any decision of significance to the parent General Organization. These sub- missions cover virtually all operating aspects of the enterprise. The hierarchical structure of the General Organizations, and their preoccupation with implementing a large number of new projects prevent rapid communication, thus delaying timely response to queries from the enterprises on matters often of critical importance for day-to-day operations.l/ 10.52 The managers of enterprises accept the planning and coordinating role of the General Organizations, but are critical of routine interference in their day-to-day operations. Paradoxically, negative decisions on matters referred to the General Organizations are in fact rarely given to the enter- prises, since the former are often unable to make proper technical decisions, much less to provide technical assistance, due to lack of adequate specialist staff. In view of this inability of the General Organizations to perform supervisory and control functions effectively, there is a strong case for granting enterprise managers more autonomy in their operations than they have thus far enjoyed, but subject to accountability to a set of well-defined performance targets. The next section will explore some possible alternative ways of improving industrial planning and the management and financing of public manufacturing enterprises. PLANNING AND ORGANIZATIONAL OPTIONS IN THE PUBLIC MANUFACTURING SECTOR 10.53 The Syrian authorities are well aware of the planning and organiza- tional problems affecting the public manufacturing sector, and are actively in 1/ For an elaboration of the points raised here see Volume 3, Annex 3, Chapter 2. - 308 - search of pragmatic means to enhance the contribution of the sector to achieve- ment of Syria's economic and social objectives. On the basis of the analysis carried out so far, some alternative institutional and organizational arrange- ments for the public manufacturing sector are presented for consideration. Considering the growing importance of the sector, its demand on scarce finan- cial and skilled human resources, and its potential for generating budgetary revenues and foreign exchange earnings, improvements in planning, management and control mechanisms in the sector would seem a logical step complementary to the emphasis placed on investment in public manufacturing projects during the Fourth Plan period. Investment Planning and Project Selection 10.54 To improve the effectiveness of investment planning and project selection, the State Planning Commission's (SPC's) Industrial Planning Depart- ment could be strengthened so that it could effectively discharge its function of planning for the sector. This would involve addition of considerable qualified staff (economists, financial analysts and engineers). The SPC would then be in a position to ensure not only that the sector's investment plan is sound in terms of its size and composition (for example, in relation to demand and supply forecasts and linkages, both within and among industries), but also that the projects submitted by the General Organizations for inclusion in the Five-Year Plan have been adequately evaluated on the basis of economic and financial analysis. 1/ 10.55 In addition the Ministry of Industry's planning unit could be strengthened so that it can carry out intra-sectoral planning, evaluation and screening of project proposals of the General Organizations before transmitting them to the SPC. It would also have responsibility for follow-up of project execution. This would -necessitate that the General Organizations be integrated into the administrative structure of the Ministry of Industry, rather than being directly responsible to the Minister of Industry. The Ministry of In- dustry could also serve to foster cooperation and complementarity between public enterprises and the private sector, whose participation in Syria's future industrial development the Government, judging by recent official pronouncements, wishes to promote. Finally, project identification, prepara- tion and evaluation capabilities of the General Organizations need to be substantially incteased. The General Organizations and the constituent enter- prises are, after all, the entities most closely in touch with the realities of industrial development and it is they who utilize factors of production and 1/ This is not to say that only economic and financial criteria should govern project selection, but that economic analysis when based on appropriate methodology, would assign weights to various social objectives. - 309 - supply goods. Addition of specialized staff at all levels of the public enterprise system is a necessary, but not sufficient, condition for improving the performance of the sector. Management 10.56 The 1975 reorganization of the three "Unions" into six General Organizations may be pursued further to allow for greater specialization by the General Organizations, along more homogeneous product lines. The Textile General Organization, which has since 1968 been the most specialized group, seems to obtain more positive results in programming and planning in the subsector. The creation of the separate General Organizations for Cement (which could encompass all mineral-based building materials) and for sugar and chemicals and related products was a step in the right direction. The General Organization for Food Industries may be further subdivided by estab- lishing a new organization for vegetable oil milling, which is an important industry on its own. Similarly, the General Organization for Chemicals, which has under its supervision plants producing, among other things, fertilizers, leather products and glass, may be split into smaller organizations. In particular, the fertilizer industry, which is expected to become an important product line by the end of the Fourth Plan period, may be put under a separate General Organization. 10.57 Within the General Organizations, it seems desirable to have separate units entrusted with responsibility for implementation of new projects and for supervision of the existing units, in order to give the requisite attention to the needs of the latter. Targets and Incentives 10.58 Concomitant with introducing measures to improve planning mechanisms and organizational set-up in the public manufacturing sector, there is need for instituting a system of well-defined targets and a reward structure that would stimulate better performance on the part of managers and workers. As discussed earlier, the present targets are not carefully formulated and do not appear to be linked with the reward structure. The primary success indicator for managers of the General Organizations seems to be initiation and imple- mentation of new projects. For managers and workers of the enterprises, there appears to be no link between performance and remuneration.l/ Better performers receive greater consideration in promotion decisions, but this by itself does not constitute a sufficient incentive system for inducing improved performance by the enterprises. 1/ Until 1970, 25 percent of an enterprise's net profit was distributed to employees of the enterprise, but the practice was replaced by dependency allowances. - 310 - 10.59 Designing a good systems of success indicators and incentives is not an easy task. We are not in a position to prescribe an ideal incentive system for stimulating improvements in performance of public manufacturing enterprises in Syria. The devising of such a system could best be done by Syrian authorities who are familiar with local conditions. The following guidelines, however, may be suggested for use in formulating an appropriate incentive system. 10.60 The General Organizations and the enterprises could be given (by the SPC) multidimensional targets, among the most important of which could be value of output, domestic sales, exports, labor productivity and profit- ability. The latter could be expressed in terms of (current) value of assets (including working capital). The choice of inputs and product mix could either be fixed centrally or left to the enterprises. If the latter method is chosen, then there would be a need for a turnover tax (or a variant thereof) to limit the production of goods which are not considered socially desirable. In fixing targets, the central planners must ensure that the-targets are realistic. 10.61 The performance of the General Organizations and the enterprises could then be measured in terms of success in achieving the targets. A bonus fund, bearing significant relation to salaries and wages of managers and workers, would be used to reward overfulfillment or penalize underful- fillment of the targets. Ex-factory prices would need to be fixed on the basis of cost plus a margin of profit determined by the opportunity cost of capital. If the Government wishes to subsidize the consumption of particular goods, it could adjust retail prices accordingly. 10.62 The foregoing system of targets and incentives would clearly require considerable manpower at various planning and control levels, but is one that is essential to the efficient functioning of a centrally planned economy. 10.63 Alternatively, a decentralized system could be adopted under which planning above the enterprise level is abolished and the role of the SPC would be primarily confined to delineating broad targets designed to fulfill national economic and social objectives. The Government would institute policies and measures which would encourage public enterprises to pursue those objectives through the marketplace. The emphasis under this alternative is on financial incentives, and public enterprises would be unfettered from a plethora of targets and controls inherent in the command type of centrally planned economy. 10.64 The primary vehicle for motivating enterprise efficiency through financial incentives would be linking employees' remuneration and the enter- prise's ability to expand its after-tax profit performance. Enterprises would supplement internally-generated funds by borrowing from banks. Bud- getary grants to supplement loans would be limited to enterprises clearly identified as deserving special treatment on social grounds. However, even these enterprises would be expected to pay dividends from their after-tax profits to the Government in some relation to the grants received. - 311 - 10.65 A number of special problems arise under this alternative, two of which deserve special mention. The first is that prices would have to be left to fluctuate according to market conditions, and imports may have to be used to moderate m3nopolistic elements present in the industrial market structure of a country like Syria. The tariff and other protection measures and the foreign exchange regime would have to be relied upon as a primary tool for countervailing the monopolistic power of public enterprises. In addition, competition between public and private enterprises could provide another check-albeit probably a limited one--against excessive profits. 10.66 Second, decentralized operation of public enterprises would. be likely to pose a conflict with the short-run micro-level full employment goal of the Government. Workers might have to be discharged as a result of enter- prise inefficiency, changing market conditions and other factors which might, at the limit, force the enterprise to discontinue operations. Moreover, relocation of workers might become necessary. Both of these, especially dismissals, might prove politically and socially unpopular. 10.67 The choice among the two broad alternative forms of public enter- prises' management outlined above or some mix of the two can be made only in the context of broader considerations involving the ongoing evolution of Syria's socialist economic system and with due consideration for efficiency in fulfilling the economic and social objectives of the country. INVESTMENT FINANCING OPTIONS 10.68 The financing mechanism for investments by public manufactiuring enterprises in Syria is currently under study. The Government intends to transform the existing Industrial Bank, whose role in, and capacity for, financing capital formation is limited, into an industrial development bank. The proposed bank would presumably take over the functions of the Public Debt Fund in the financing of investments by the public manufacturin,g sector. 10.69 The need for, and the effective functioning of, a development finance institution in the Syrian context depends to a large measure on the degree of centralization of planning, project preparation and screening, and management in the public manufacturing sector. Under a highly centralized system, where project selection is determined through the five-year and annual plans and project preparation is centrally monitored, a financial institution for industry would serve an accounting purpose. Such an insti- tution would function as a conduit for the transfer of budgetary investment allocations and external loans to the public enterprises, as the Public Debt Fund now does, and keep strict accounts of financial flows through the system. The institution would be obliged to finance all projects included in the Plans, unless it is given the right to reject the financing of projects which are not well prepared. However, with the strengthening of the planning and project selection apparatus which could result from the improvements suggested earlier, there should in principle not be any projects included in the Plan which do not meet agreed preparation standards. - 3i12 - 10.70 However, should there be a decentralization of planning, decision- making in project selection, and management of public enterprises, then there would be a need for a development finance institution with project appraisal capacity and discretionary power in the selection of projects it finances. Such an institution could cater to the long-term and medium-term financing needs of public (as well as private) manufacturing enterprises. Thus, in short, the need for having a genuine industrial development bank in Syria would have to be determined largely on the basis of the desired degree of decentralization in planning, project selection, and management of public manufacturing enterprises. - 313 - CHAPTER 11 FISCAL AND MONETARY POLICIES 11.01 Tne role of fiscal and monetary policy in Syria over the decade from 1966 through 1976 can best be understood if the contours within which it had to be applied are defined in terms of constraints and basic choices. During the past decade, the setting was characterized by massive defense expenditures and by a socialist institutional framework intended to permit centralized government control of the economy. Control of the economy has led to public investment representing about two-thirds of total invesl:ment; to nationalization of the banking system; and to control of wholesale trade; leaving to the private sector strictly regulated predominance in farmiLng, retail trade, and small-scale industrial activities. Defense expenditure, which before the 1i67 war had been equivalent to 7 percent of gross domestic product (GDP) and about half of government receipts, in 1976 was equaL to 15 percent of GDP and exceeded the sum of government budget receipts. GROWTH, WELFARE, AND EMPLOYMENT, 1966-76 11.02 Fiscal policy is usually deemed to have an essentially compensatory (anticyclical) function in developed countries and a growth-promoting role in developing countries. In fact, this difference in accent loses much of its validity when, as has been the case in Syria, demand management is under pressure from a constraint, unrelated to growth, like defense expenditure. Considering that over the years 1966-76 public investment covered most of the modern industrial sector in addition to the traditional area of basic social and economic infrastructure from health and education to housing, communica- tions, and agriculture, the responsibility of fiscal policy has extended well beyond the compensatory finance stage, while at the same time the government has had a compensatory task considerably more difficult than the traditional one as a result of the pressure on available resources coming from defense expenditure and, since 1972, from the cost of price subsidies for vital commodities. The latter raises the broad issue of redistribution of income through direct income support programs and indirectly through expenditure on social and basic infrastructure. 11.03 Welfare programs are the concern of all governments but espe- cially of such socialist-oriented governments as Syria's. Over the years, the struggle between growth management and demand management (stability), made especially acute by the burden of the defense effort, meant that social welfare expenditure became the dependent variable of the government fiscal equation. This was true of capital expenditure as well as current expenditure for social purposes, as the largest increment in investment was allocated to This Chapter draws upon the work of Mr. Gabriel Sciolli and Mr. Basil Al-Bustany. - 314 - industry. Inadequately satisfied in terms of the provision of public goods, the welfare function has also been neglected in terms of redistribution of private incomes, and has been only partially satisfied in terms of the redis- tribution of assets through agricultural land reform (see Volume 3, Annex 2). Other developments that presumably have had a negative impact on the distribu- tion of income and wealth include relatively modest reliance on traditional taxes, permitted by the accrual of substantial oil revenues; failure to increase the role of direct taxes; and the decline of yields from taxes on property and wealth (especially due to the failure to capture capital gains on real property). On the positive side--for the people if not for the government budget--has been the price stabilization program for vital com- modities, with particular stress on those imported and subject to steeply rising international prices. Here too, however, the failure to allocate the subsidies in a progressive fashion, giving less to the upper-middle and rich income groups, has had significant negative results in terms of equity and efficiency. 11.04 The two-digit inflation rates experienced in recent years have con- tributed substantially to worsen the growth and welfare picture of the coun- try, making the task of fiscal and monetary policies increasingly difficult notwithstanding the substantial accrual of oil revenues and foreign loans. Inflation has been the result of higher import prices, pressure on domestic resources from the defense effort, and the failure of demand management policies to curb investment and private and public consumption--including in the latter the current deficits of public enterprises. Moreover, inflation in turn generates a number of distortions which themselves are often the cause of additional inflationary pressure, thus making inflation a constraint on government policies. 11.05 The price-support scheme is a good example of increased government consumption resulting from increased import prices. If no such scheme had been introduced, moreover, more substantial wage increases should have been granted. Another significant consequence of inflation in Syria has been that the expectation of price increases caused a basic distrust for any form of liquid asset except in the form of capital flight; hence a speculative rush on real estate; all this while there was a shortage of middle and low income housing. Furthermore, the fact that government wages and salaries have not been allowed to increase with inflation, has drastically reduced real income of wage earners and a substantial backlog of pent-up demand which cannot remain unsatisfied for much longer. 11.06 The constraints and basic political choices discussed above are not exclusive to Syria, but the employment picture in Syria does differ somewhat from that in the majority of developing countries, and has had a positive effect on fis_cal and monetary policies. The estimated unemployment rate was 4.8 percent in 1975--the latest available year--had been at this level since 1972, and had risen to 7.5 percent in only two of the preceding ten years (1968 and 1971). If the Syrian figure were an accurate measure of the real - 315 - unemployment level, it would reflect a situation of full or almost full employment, 1/ made possible by the high number of emigrants, estimated at betwen 400,000 and 500,000. One could say the emigration is essentially an exogenous factor and has therefore represented a windfall gain from the standpoint of fiscal and monetary policy, which otherwise would have had to sustain the burden of job creation for a substantially higher level of un- employment (18 percent without emigration). The cost to the budget of a substantially lower number of emigrants in terms of loss of remittances and additional cost of food subsidies and social and health services would become enormous if enough jobs were to be created to keep the unemployment rate below 10 percent. 11.07 Whatever liquidity problems may be caused by emigrant workers' remittances are certainly secondary to the direct benefits in terms of for- eign exchange, especially as during 1966-76 monetary policy played a minor role in Syria. This raises the general problem of the scope for monetary policy in a system where all banks have been nationalized, interest rates are not used as signals for resource allocation or resource mobilization, credit is allocated by direct credit ceilings, and the Central Bank--for that matter the whole banking system--functions as the cashier of the Treasury. 11.08 On balance, it seems that growth, stability and welfare have not been served to the full extent possible by fiscal and monetary policies during the last decade. The resource mobilization process can be much more vigorous, as the currently low level of government receipts indicates; excessive private consumption by the higher income classes could be more seriously restrained, especially by eliminating (or reducing) the advantages they derive from the vital commodities subsidy; more should be spent on health and housing for urban low and middle income groups. Fiscal and monetary policy in turn, could be much better served by a more carefully planned investment policy. The deficits of a number of public enterprises represent a continuous heavy burden on public finances, so that the financial and monetary authorities have no choice but to comply with the requests of the public sector. If the banking system has acted as cashier for the Treasury, it is no less true that the Treasury has acted as the cashier for the invest- ment program. 1/ As pointed out in Chapter 4 (Population, Employment, and Incomes), how- ever, the number of jobs created has been inadequate to absorb all those actively seeking work. Open unemployment therefore remains a serious problem, particularly for the young, despite the drop in the unemployment rate in recent years. - 316 - FACTORS AFFECTING PUBLIC SAVINGS 11.09 Two factors dominated the evolution of resource mobilization over the decade 1966-76: (a) a growing structural imbalance in the current operations of the central government due to the defense effort; and (b) a fast-growing surplus generated by the public enterprise sector as a result of the post-1973 oil boom (see Table 11.1). Table 11.1: PUBLIC SECTOR SAVINGS, INVESTMENT AND OVERALL DEFICIT (SL million) Est. 1966 1970 1973 1974 1975 1976 1977 Central Government -68 -308 -545 -1136 -2355 -3097 -3490 Receipts 652 980 1697 2068 2806 2969 3154 Expenditure 720 1288 2242 3204 5161 6066 6644 Public Enterprises Surplus /a 197 471 979 .2254 3793 4019 3512 Savings 129 163 434 1118 1438 922 22 Investment 357 740 1098 2370 4502 5212 6000 /b Overall Deficit 228 577 664 1252 3064 4290 5978 /a Includes surplus of local authorities. 7-b World Bank estimate. Source: Table SA 5A.1, SA 5A.2. 11.10 The existence of a permanent deficit on the current expenditure budget comes as no surprise in a country where defense expenditure averaged about 15 percent of GDP at current factor cost between 1970 and 1976. Other current expenditures having remained at more or less the same proportion of GDP, the size of the deficit could only depend on the performance of central government receipts, mostly tax revenues. The performance of current receipts was unsatisfactory (Table 11.2) especially toward the end of the period, when dues from the pipeline gradually disappeared and tax revenues did not manage to rise above the level of the late sixties. - 317 - Table 11.2: PUBLIC SECTOR PERFORMANCE INDICATORS (Percentage) 1966 1970 1973 1974 1975 1976 As % of Investment Public Savings /a 36 22 39 47 32 18 Public Investment /b 56 65 58 74 62 61 As % of GDP at Factor Cost Public Enterprises Surplus 4.5 8.0 11.1 16.2 20.1 16.9 Government Receipts 14.9 16.6 19.2 14.9 14.9 12.5 Tax Revenue (11.7) (11.4) (12.2) (11.3) (12.4) (11.3) Savings 3.0 2.8 4.9 8.0 7.6 3.9 Investment 8.2 12.5 12.4 17.1 23.9 21.9 Overall Deficit 5.2 9.8 7.5 9.0 16.2 18.0 Defense Expenditure 7.2 13.0 16.8 12.1 17.4 15.2 Non-Defense Current Expenditure 9.2 8.9 8.6 10.9 10.0 10.1 /a As percent of public investment; based on data in Table 11.1. 7b As percent of fixed investment; based on data in Table SA 2B.4. Note that public investment figures as recorded in the National Accounts are generally smaller than those derived from the budget due to slightly different methods of estimation. Source: Tables SA 2B.4, SA 5A.1, and 11.1. 11.11 The decline in dues from the oil pipeline was a negative factor out- side the control of the government, but the poor performance of tax revenue was not, and its implications in terms of mobilizing generating resources for development and contributing to better distribution of income are obvious. Not only did tax yields show insufficient buoyancy in their response to rising GDP, but by any international comparison, the level of tax revenue was and has remained on the low side (for details of past unsatisfactory performance, see below). It is true that, especially after 1973, the public enterprise surplus rose so fast that despite the equally significant rise in defense spending public savings could be expanded substantially. This might be thought to justify the sluggishness in tax revenue growth on the basis of an implicit strategy of trade-off in revenue raising; but the policy was certainly not deliberate and was much less wise. In fact, this behavior has called for an excessive reliance on such receipts as public enterprise surpluses and pipeline dues--the latter, by definition, a very volatile item, as experience in many countries indicates and as the 1976 and 1977 experience - 318 - in Syria has shown. 1/ A further implication of this policy is that when the need to increase traditional revenues (tax receipts) arises, it is usually very difficult to step up the tax effort within a short period without running into political as well as administrative difficulties. The argument that such policy should be easier when the existing tax burden is low does not carry much weight-, as it is at the margin that such problems arise. 11.12 In itself the savings performance of the public sector between 1966 and 1975 had been improving as savings rose from 3 percent to 8 percent of GDP. The contribution of public savings to the financing of investment, how- ever, averaged about one-third, except in 1974, when it covered almost one-half of total investment. The modest contribution of savings to investment from 1970 to 1975 (Table 11.2) is explained by the fact that investment itself rose at an almost unbelievable rate, from 12 percent of GDP in 1973 to 24 percent in 1975. In 1976 savings declined sharply to 4 percent of GDP and 18 percent of investment; despite a reduction in the role of defense expenditure and with other current expenditure remaining practically unchanged, the absolute fall in pipeline dues and the decline in the surplus of enterprises (from 20 per- cent to 15 percent of GDP) cut public savings in half. For example, if tax revenue in 1976 had remained at the level of 1975, 12.4 percent of GDP, savings would have been larger by almost SL 400 million, covering 22 percent rather than 18 percent of investment. The fall in savings was then the result not only of negative accidental factors, but of poor tax policy. 11.13 The failure to generate adequate savings has inevitably pushed the overall deficit to a level clearly out of proportion to available resources within the country. The consequent credit expansion, added to the extra- budgetary financing of a portion of the cost-of-living subsidies and of the operating deficits of a certain number of public enterprises brought about sharp inflationary pressures. Between 1973 and 1976 prices rose by well over 20 percent a year. Middle and low income groups have been especially hard-hit by inflation; increases in food prices and in rents for newly con- structed dwellings have sharply reduced the real income of large sections of the population while at the same time public expenditure for basic infra- structure has also declined in real terms (see Chapter 6, Resource Allocation). In such conditions, the price support scheme, certainly a costly operation, should nonetheless be considered an essential policy measure. A graduated scheme, however, would not only be more acceptable in terms of equity, but would cost the government less. 11.14 The size of the overall deficit of the public sector, as shown in Table 11.2 above, was not exceedingly high for a country at war up to 1973. As of that year, however, both as a result of the stepping up in the defense effort and in investment and of the large increase in cost of living subsidies - due to the rise in the international price of mass consumption 1/ A simple but useful arithmetic reminder: savings being a "difference" between two magnitudes, are extremely sensitive to very small per- centage changes in either magnitude which might very well be in the nature of things. 315j - commodities - the increase in the deficit has been dramatic, moving from SL 0.6 to 4.5 billion. If one looks at how the deficit has been financed in the more recent and critical years (see Table SA 5.1) one notices that in the two years of more active war, i.e., 1973 and 1975, the-deficit was financed largely through transfers from Arab countries thus allowing for an absolute decline in net claims of the banking system on government. In 1973 Arab countries transfers were twice the amount of the overall deficit and in 1975 almost equal to it. In 1974 and 1976, a much greater reliance had to be put on domestic borrowing, especially in 1976 when it rose from SL 448 to 2538 million. In this year external borrowing also increased to more than SL 1000. as a result of the heavy investment program. As to the impact on the economy of the financing of the deficit it is obvious that the transfers from the Arab countries while preventing external borrowing and its servicing reaching a disruptive level contributed, to the extent of their local financing component, to divert real resources from the civil to the military sector exerting a great pressure on domestic prices. From this viewpoint they had the same impact as the large expansion in domestic borrowing in 1974 and 1976. Structure of Public Revenue 11.15 In the preceding section reference was made to the issues resulting from excessive reliance on nontax receipts. The decline in the share of tax revenues in total receipts has been continuous since surpluses from public enterprises rose after 1970 and especially since 1973 (Table 11.3). Pipeline dues peaked in 1973 with 20 percent of total revenue and started fading away immediately thereafter when, fortunately, the public enterprise surplus picked up in what turned out to be one of the fastest growths in Syria's revenue raising effort. Since both pipeline dues and surpluses can be considered as being basically outside the control of fiscal policy, the changes in the structure of government revenue have reduced considerably the capacity of the government to increase total revenue as needed. For example, a 10 percent increase in total revenue in 1966 would have required a 17 percent increase in tax revenue; to obtain the same result in 1976 the increase in tax revenue would have to be in the order of 30 percent, in itself a very difficult target to attain without a negative impact on the level of activity or on private consumption. With a tax elasticity of 1.4 (a reasonable estimate considering the progressivity of income and profit taxes and the fact that imports tend to increase faster than GDP), tax revenue in 1976 would have attained a level of SL 3.7 million (against the actual SL 2.6 million) representing 46 percent of total revenue and 15 percent of GDP, still a relatively low burden. The same 10 percent increase in total revenue would require a 20 percent increase in tax revenue, a more feasible target. - 320 - Table 11.3: STRUCTURE OF GOVERNMENT REVENUES (Percentage of total) 1966 1970 1973 1975 1976 1977 Tax Revenue 60 46 40 36 39 45 Petroleum Dues 14 15 20 6 2 - Other Non-Tax Revenue 3 6 3 1 1 2 Public Enterprise Surplus 23 33 37 57 58 53 Total: Percentage 100 100 100 100 100 100 Value (SL mlns.) 849 1,451 2,676 6,599 6,988 6,666 Source: Tables SA 5A.3 and SA 5A.4. The Surplus of Public Enterprises: Gross or Net? 11.16 The surplus of enterprises is basically dependent upon the surplus of petroleum production (Table 11.4). Another significant component is the surplus from public banking and finance, which in 1975 and 1976 was at an exceptionally high level due to foreign exchange profits. A "surplus" from social security, of the order of SL 150 million in 1976 is included in banking and finance. Problems of changes in classification explain the high level of "others" in 1976 and 1977. Table 11.4: SURPLUSES OF PUBLIC ENTERPRISES - (SL million) Budget Est. 1966 1970 1973 1975 1976 1977 Banking & Finance Sector 36 145 213 810 872 331 Commercial 20 57 74 283 80 130 Public Utilities 32 54 61 207 61 18 Industrial, Transporta- tion, and Construction 89 149 540 2,491 2,662 2,789 of which: Oil ( ) () (..) (2,380) (2,640) (2,300) Others 20 66 91 2 344 244 Total 197 471 979 3,793 4,019 3,512 Source: Table SA 5A.4. 11.17 The most critical issue concerning the public enterprise surplus is its very meaning in economic and financial terms. Specific problems of the overall performance of the industrial sector are dealt with in the chapter on -321- industrial organization, but the broad question is whether the surplus should be considered a net current transfer to the Treasury (into the so called Public Debt Fund) or whether it is a gross transfer, deficits in the opera- tions of a number of enterprises being covered by the central budget (public debt fund) by credit from the banking system. The former should in theory provide only investment-financing but one hesitates to accept this interpreta- tion. The fact is that information on the financial flows between Government, public enterprises and the banking system is at present quite unsatisfactory. The department in the Ministry of Finance responsible for controlling the activities of public enterprises, admits that it cannot get a comprehensive picture, mainly because there are very long delays in obtaining the balance sheets as well as the profit and loss accounts of the enterprises and because the information provided is not complete. 11.18 In these -conditions one must rely on indirect indicators and the most significant of them are provided by the data in the monetary survey (see Table SA 6.1) which show an impressive credit expansion of the public sector notably from 1972 through 1976. The monetary data give the end result of the financial transactions of the public sector, but in the absence of more detailed data no meaningful analysis is possible. Low Buoyancy and Inadequate Performance of Direct Taxes 11.19 The Syrian Government, over the ten years 1966-76 has not made effective use of the tax system to mobilize resources for development or obtain a better distribution of income. The evidence, as mentioned above, is the continuously low ratio of tax revenue to CDP between 1966 and 1977. This is unfortunate and tends to support the view of those experts on development who have discarded the tax instrument as an ineffective means of bringing about any significant income redistribution in the growth process. The fact is that governments should be reminded that taxes, if effectively applied, still remain a most powerful tool to redistribute physical and human assets and income. Examination of the-Syrian tax structure (Table 11.5) reveals that direct taxes maintained their role unchanged during the decade and that the main trade-off has occurred between indirect taxes on domestic production and consumption and the miscellaneous taxes and fees lumped together under "other tax revenue." - 322 - Table 11.5: TAX REVENUE - STRUCTURE (Percentages) 1966 1970 1973 1975 197-6 1977 Direct Taxes 26 30 24 26 28 26 Taxes on Income & Profits 20 24 20 23 25 24 Taxes on Property & Wealth 6 6 4 3 3 2 Indirect Taxes 26 29 24 11 9 14 Taxes on Agricultural Production 8 5 5 2 3 3 Profits from Fiscal Monopolies 13 15 13 6 5 7 Excise Taxes 5 9 6 3 1 4 International Trade Taxes 35 27 34 39 41 39 Import Duties and Taxes 28 23 30 37 39 36 Export Taxes 7 4 4 2 2 3 Stamp Duties 7 8 7 8 7 6 Others /a 6 6 11 16 15 15 Total 100 100 100 100 100 100 /a Including car fees, television fees, justice and other administrative services receipts. Source: Table SA 5A.3. 11.20 The most important of these miscellaneous revenues are the motor vehicle tax, the exit tax and the so-called consular fees. The consular fees are assessed on Syrian business affairs, in particular for certificates of origin for Syrian exports and for activities of Syrians abroad who are very numerous. The intensive movement in and out of the country by Syrians (and other nationals as well) explains the fairly high yield of the exit fee (about SL 110 million in 1976). The yield of the motor vehicle tax is of the same order of magnitude. The increased importance of these fees is in itself a positive indicator of the ability of the government to tap expanding sectors of activity, but the sharp decline in domestic indirect taxes is really exces- sive as the data on the buoyancy of the tax system in Table 11.6 indicate. 11.21 Within direct taxes there has been over the years a tradeoff between increased income and profit taxes on the one hand and property and wealth taxes on the other. Again, as the buoyancy data show, the decline of the yield of property and wealth taxes from 0.7 percent to 0.2 percent of GDP at current factor cost implies a failure to keep the burden on property in line - 323 - with income taxation. For example, taxes withheld from wages and salaries increased from SL 12 million in 1966 to an estimated SL 75 million in 1976, while property and wealth taxes were rising from SL 32 million to SL 56 million. 11.22 The overall sluggishness of the Syrian tax system in responding to the rise in GDP; is shown in some detail in Table 11.6. No attempt has been made to separate the built-in elasticity of the tax system from changes due to variations in the rate; such an exercise is ruled out by the lack of information on the specific tax basis for some of the major taxes, together with the inherent statistical difficulties. Besides, when evaluating Ex-post the performance of the tax system as a tool of fiscal policy it is relatively unimportant whether revenue growth has been the result of built-in elasticity or of ad-hoc changes in the rates. The real issue is the ability of the government to harness the expansion of the tax base to its growth and distri- bution targets. The conclusion which can be drawn is very clear: contrary to all expectations, the buoyancy has been less than 1 notwithstanding (a) a number of upward adjustments in the income and profits tax rates (including defense surcharges) as well as in other indirect taxes; and (b) a very high initial ratio of imports to GDP, therefore a high degree of openness of the economy and an increase in this ratio. - 324 - Table 11.6: GDP BUOYANCY OF THE TAX SYSTEM (Percentages) Buoyancy 1966 1970 1973 1974 1975 1976 1966-76 Direct Taxes 3.0 3.4 2.9 2.6 3.2 3.1 1.04 Taxes on Income & Profits 2.3 2.7 2.4 2.3 2.9 2.8 Taxes on Property & Wealth 0.7 0.7 0.5 0.3 0.3 0.3 Indirect Taxes 3.0 3.3 2.8 1.6 1.3 1.0 0.20 Taxes on Agricultural Production - 0.9 0.6 0.6 0.5 0.3 0.3 Fiscal Monopolies 1.5 1.7 1.5 .0.7 0.7 0.6 Excise Taxes 0.6 1.0 0.7 0.4 0.3 0.1 Taxes on International Trade 4.0 3.1 4.2 4.0 4.8 4.7 1.21 Import Duties 3.2 2.6 3.7 3.4 4.6 4.4 Export Taxes 0.8 0.5 0.5 0.6 0.2 0.3 Stamp Duties 0.8 0.9 0.9 0.8 1.0 0.8 0.89 Other Fees 0.8 0.7 1.5 2.2 2.1 1.7 2.37 Total 11.6 11.4 12.3 11.2 12.4 11.3 0.96 Buoyancy Excluding "Other Fees" 10.8 10.7. 10.8 9.0 10.3 9.6 0.86 Import Duties as % of Imports /a 12.6 10.1 13.8 11.4 15.3 11.9 /b Import as % of GDP 25.5 25.2 26.6 30.0 30.1 37.0 /b /a Based on Customs Office data. /b The ratio becomes 13.5 once adjustment for gold imports is made. The import/GDP ratio is 30.1 once the above adjustment is made. Source: Tables SA 2B.4, SA 3B.1 and SA 5A.3. 11.23 The performance of direct taxes is disappointing mostly due to the decline in revenue from property and wealth taxes. But even the income and profit taxes could have done substantially better; here the main cause is tax evasion as a result of poor profit tax administration. The decline in receipts from fiscal monopolies and excise taxes, especially after 1973, is striking; the yield of such taxes has a tendency to fall behind the growth in the nominal GDP in periods of inflation such as occurred in Syria. Only-ad hoc - 325 - increases either in the tax rates or in the prices of the goods taxed c.n modify this tendency. There was certainly a mixture of deliberate policy in favor of lower income groups (as in the case of sugar) and of poor tax plan- ning (as in the case of tobacco). The performance of stamp duties can also be considered disappointing, especially as 70 percent of the tax proceeds :ame from stamps on contracts, the nominal value of which should keep pace with inflation; an element of tax evasion must be present. Other fees have been the most responsive source of revenue and this should be considered a very positive factor. 11.24 The yield of customs duties has increased faster than GDP and basic- ally in line with imports, with a few ups and downs in certain years. As imports have increased faster than GDP over the same period, the performance of customs duties is no more than acceptable considering the increases in tariff rates on some consumer imports during this period. There are two main reasons for this somewhat disappointing trend. Smuggling is a very pervasive practice against which the customs administration has been impotent; in fact, at times it is said to have favored it. A large share of goods imported by public enterprises and ministries (health, education) are exempt from duty, the rationale being the social "purpose" of such imports. The customs depart- ment estimates the value of exempted imports at two thirds of the total. There might be some exaggeration in this figure, but certainly the amount is very large. The principle of exempting products of particular social value is an acceptable one, but by imposing very low tariffs, and none at all on capital goods purchased by private businessmen who then evade profit taxes, the government is faced with a loss of revenue which is not justified by the growth objective of tariff exemption. Allocation of Public Expenditure 11.25 The followinig facts stand out when looking at the structure of public expenditure over the ten years 1966-76 (Table 11.7): (a) on the average, defense expenditure absorbed one-third of total public expenditure; (b) from 1968 to 1973 expenditure on economic sectors had been running below defense expenditure in most years, and only thereafter took the lead as a result of the boom in both oil revenues and foreign aid; (c) as of 1974, cost of living subsidies became a fairly signif- icant claim on resources; (d) by and large, expenditure for basic and social infrastructure lost ground, mainly to industry; and (e) current economic expenditure on agriculture and transportat:ion seems to have been inadequate. - 326 - Table 11.7: STRUCTURE AND LEVEL OF PUBLIC EXPENDITURES 1966 1970 -1973 1976 SLm. % SLm. % SLm. % Defense 316 29 766 38 1,491 45 3,634 32 Economic Sectors 384 36 764 38 1,083 32 4,092 36 Education Health 202 19 286 14 419 12 1,675 15 Income Support - - - - 1,106 10 General Administration Transfers 175 16 212 10 347 11 771 7 Total 1,077 100 2,028 100 3,340 100 11,278 100 As % of GDP at Factor Cost Defense 7.2 13.0 17.0 15.2 Non-Defense 17.4 21.4 21.0 32.'1 Investment (8.2) (12.5) (12.4) (21.9) Total 24.7 34.4 37.8 47.3 Source: Tables SA 2B.4 and SA 5A.2. 11.26 The decade 1966-76 is in fact divisible into two periods, the first from 1966 through 1973 and the second from 1973 through 1976. The annual rate of growth in selected items of recurrent public expenditure for each of these periods and for the decade as a whole was as follows (in current prices): 1966-1973 1973-1976 1966-1976 Defense 25 35 28 Economic services 16 56 27 Education and other social expenditure 11 59 24 Gross domestic product at factor cost 11 39 19 During the first period defense showed the most rapid rate of growth; when it slowed after 1973, expenditure for economic and social services picked up momentum. After the rise in import prices for wheat and sugar in 1973 the government decided not to pass on the price increase to consumers, and intro- duced subsidies for vital commodities. It should be noted that the high annual growth rate for the period 1973-76 reflect the strong inflationary pressure of those years. For the decade as a whole, education and health - 327 - received less than either defense or economic services, but the gap was narrower than before 1973. The changes in the structure of current and capital expenditure on economic and social services are indicated in Table 11.8. Clearly the role of expenditure for transport, communications and public works declined by almost one half, and this was true of education and health services as well. Agriculture became increasingly important in the late sixties but then decreased very sharply by the end of the period. It is not easy to determine the extent to which the changes in the structure of public expenditure were the result of a conscious policy which gave priority to growth over welfare. Table 11.8: STRUCTURE OF PUBLIC EXPENDITURE ON ECONOMIC AND SOCIAL SERVICES /a 1966 1970 1973 1976 SLm. % SLm. % SLm. % SLm. % Agriculture and Irrigation 56 10 286 27 372 25 735 13 Industry Mining Power 131 22 233 22 420 28 2-,187 38 Transport, Public Utilities, Public Works 197 34 245 23 291 19 1,17C( 20 Education, Culture, Information 173 30 242 23 385 26 1,494 26 Social & Health 29 4 44 5 34 2 181 3 Total 586 100 1,050 100 1,502 100 5,767 100 /a Current and capital, excluding defense and general administration expenditures. Source: Table SA 5A.2. 11.27 Another aspect to which attention should be brought is the relation between current and investment expenditure for the various sectors of interven- tion. As shown in Table 11.9 in the case of agriculture, current expenditures which in 1966 were as large as 75 percent of investment, by 1976 declined to less than 16 percent. The inadequacy of current expenditure in agriculture is not exclusive to Syria; but the level of resources allocated to agriculture is exceptionally low. The very low level of current expenditure for industry is easily explainable, as it covers essentially the wages and purchases of goods and services by the Ministry of Industry. For Transport, Public Utilities and - 328 - Public Works, the level of current expenditure also seems to be on the low side, especially as it should cover, among other things, expenditure for maintenance of the road network, an area which is often neglected by most budgets. Table 11.9: CURRENT AND INVESTMENT EXPENDITURE ON ECONOMIC AND SOCIAL SERVICES (SL millions) 1966 1970 1973 1976 Invest- Invest- Invest- Invest- Current ment Current ment Current ment Current ment Agriculture & Irrigation 24 32 36 250 48- 324 99 636 Industry, Mining, Power 3 128 5 228 11 409 11 2,176 Transport, Public Utilities and Public Works 22 175 26 219 24 267 102 1,068 Education, Culture, Information 159 14 220 22 336 49 734 760 Social and Health 27 2 41 3 24 10 121 60 Total 235 351 328 722 443 1,059 1,067 4,700 Source: Table SA 5A.2. 11.28 The figures for education expenditure indicate a surprisingly low level of capital expenditure compared to current expenditure up to 1974. This was the result of a policy of "heavy reliance on rented rather than purpose- built facilities to cater for a substantial proportion of new enrollments".l/ It would appear that in 1975 and 1976 the strategy changed towards increasing 1/ World Bank, The Education and Training System in Syria - Issues and Priorities, Internal Report, April 14, 1976, p. 15. - 329 - school building construction. The declining trend in current expenditure with respect to GDP (from 4 to 3 percent) between 1970 and 1976 is somewhat surpris- ing. The above-mentioned sector report explains this evolution as the result of relatively low recurrent unit costs, associated with a relatively high rate of educational efficiency, low teachers' salaries and low expenditure on teaching and learning aids. These features have made it possible to meet the pressure of social demand for education without undue strain on the public budget. The price has been, in the opinion of many Syrian educators, "a relaxation of education standards and a decline in quality".l/ 11.29 The high rate of population growth and the inflationary pressures of the years from 1973 through 1976 indicate the need to look at the evolu- tion of public investment expenditure on basic infrastructure in real terms (constant prices) per head of population. These data, shown in Table 11.10, speak for themselves and do not require much comment. The reasons for the very low level of investment in education has already been mentioned. The decline in current per capita expenditure in education should not come as a surprise since it fully reflects the automatic impact of inflation on gov- ernment expenditure in the absence of conscious ad hoc measures to maintain the level of services at least unchanged in real terms. One additional com- ment: one should notice the sharp decline between 1966 and 1973 of investment in transport, public utilities and public works. Despite the post-1973 in- crease the sector retained the same proportionate share of investment as in 1966, 4 percent of GDP at factor cost. In fact if one considers the uLrbaniza- tion process which occurred during the 1966-76 period, the figures in Table 11.10 imply a reduction in the per capita expenditure within urban centers. Table 11:10: REAL PER CAPITA EXPENDITURE FOR BASIC INFRASTRUCTURE /a (SL at constant 1963 prices) 1966 1970 1973 1974 1975 1976 Investment Expenditures: Transport, Public Utilities & Works 32 32 23 36 35 40 Education, Culture, Information 3 3 4 5 17 26 Social Health 1 1 1 1 1 1 Total 36 36 28 43 53 67 Current Expenditures: Education 29 36 37 27 22 24 /a Investrant Expenditure based on the implicit public fixed invest:ment deflatcr. Source: Tables SA 1A.3 and SA 5A.2. 1/ Ibid, I- 15. - 330 - 11.30 Last but not least, subsidies to stabilize the prices of vital com- modities were responsible for a very significant share of the increase in current expenditure on "economic services" from 1973 on. 1/ Only the direct cost of these subsidies can be readily quantified (Table 11.11). Moreover, it seems that out of SL 4 billion in direct cost of sub.sidies between 1973 and 1976 only SL 1.4 billion was covered by the recurrent expenditure budget; the difference may have been covered by domestic borrowing, in particular from banks dealing with the trade GOs in charge of importing and distributing the vital commodities. This partly explains one-half of the very sharp increase in credit expansion to the public sector indicated by the monetary statistics for this period. This interpretation is also supported by the 1977 budget esti- mates, which carry a provision of SL 600 million for price stabilization; independent forecasts indicate that 1977 subsidies should amount to about SL 1.1 billion. Table 11:11: SUBSIDIES FOR NECESSARY COMMODITIES (Current SL million) Paid through Est. Budget up to Paid through 1973 1974 1975 1976 1977 1976 Banks Wheat 487 /b 187 207 427 547 n.a. n.a. Sugar & Rice (imported) 197 315 180 247 169 n.a. n.a. Sugar (locally produced) - 217 Ic 56 101 75 n.a. n.a. Kerosene - 229 239 113 275 n.a. n.a. Construction - 285 283 170 - n.a. n.a Transport Services - - 2 14 - n.a. n.a. Total 594 1,233 967 1,072 1,066 1,400 2,500 /a Figures in this Table differ from those provided by the G.O.C. and the Ministry of Supply which have been used for the detailed calculations in Chapter 6, Appendix 6A. The differences are due essentially to lack of information on the subsidies paid through Banks. lb Accumulated up to 1973. 7c Accumulated up to 1974. Source: Ministry of Finance. 1/ For the complicated details of the magnitude and method of financing and applying the subsidies, see Chapter 6 and its Annex 6A on the Price and Subsidy System. - 331 THE ROLE OF MONETARY POLICIES 11.31 The banking system is composed of the Central Bank of Syria; 1:he Commercial Bank of Syria; and the specialized banks, which inc!'de the Agri- cultural Cooperative Bank; the Industrial Bank; the Real Estate Bank anl the Popular Credit Bank. Credit Policies 11.32 The nationalization of the banking system, which was completed by 1963, contributed heavily to reducing the independent role of monetary policy in Syria. The Council of Money and Credit, responsible for formulating mone- tary and credit policies, is dominated by the Minister of Economy whose Ministry in turn controls a substantial number of public enterprises--very aggressive claimants on bank credit--manages the country's foreign exchange reserves, and through its Directorate on Money and Banking Affairs, exercises direct influence on banks. 11.33 As a result, over the decade 1966-76 monetary policy was called upon essentially to accommodate the rising demand for credit by the public sector. Such traditional instruments of monetary and credit policy as open market operations, reserve requirements and the discount rate mechanism re- mained practically unutilized. This led to the use of direct credit ceailings as the principal tool of credit policy. 11.34 Open market operations are rarely if ever used in developing coun- tries, where the attitude of the public reflects the preliminary stage of industrial development, and forms of investment other than liquid assets are preferred. Mandatory reserves are set by the Syrian monetary authorities, but the banks have maintained their reserves with the Central Bank at a sub- stantially higher level than the mandatory one (Table SA 6.7). This factor did not lead the monetary authorities to intervene to adjust the reserve ratio, which remained the same during the entire 1966-76 period. An even more interesting feature of this period was that after the monetary authori- ties in 1970 forbade the banks to borrow from each other, they increased their borrowing from the Central Bank instead. Motivated by concern to limit the rate of credit expansion, the 1970 measure led to the under-utilization of existing funds, and prevented the Central Bank from limiting its role to that of a true lender of last resort. 11.35 Another limitation of monetary policy common to developing ,zoun- tries is interest rates; the discount rate cannot perform a very significant role. In Syria its effectiveness was also greatly reduced because the greater part of bank credit accrued to public sector enterprises on a direct control basis, and the monetary authorities very rarely varied it. 11.36 The allocation of credit was made by sector of economic activity and channelled through the General Organizations. During the period 1966-76, by far the largest share was accorded to the commerce sector, which commanded an average of 70 percent of total credit (Table SA 6.3). On the one hand, - 332 - this reflects the particular importance of the role of the Commercial Bank, the bulk of whose operations was directed to trade transactions. On the other hand, there is evidence that a portion of this credit, ostensibly for commerce found its way to agriculture and industry. 11.37 Credit to productive activities (agriculture and industry combined) declined noticeably from 19 percent of total specialized bank credit in 1966; in 1976 their relative share fell to 15 percent: 6 percent for agriculture and 9 percent for industry. For the entire period agriculture took an average of 15 percent. and industry 10 percent. However for the industrial sector in particular Bank credit does not give the whole picture, as enterprises have direct recourse to the Treasury for financing. The allocation of bank credit (Table SA 6.3 mentioned above) shows that the public sector got the larger share, rising from 54 percent of total bank credit in the period 1966-73 to 74 percent in 1974-76 and averaging 65 percent for the decade as a whole. The relative share of the private sector declined from 40 percent in 1966-73 to 22 percent in 1974, but averaged 30 percent for 1967-75. Finally the rela- tive share of the cooperative sector remained extremely low and stagnating at an average of only 3 percent of bank credit. 11.38 The increase in bank credit to the public sector, resulting from increasing government deficits and financial needs of public enterprises-- especially those dealing with imports of vital commodities--coincided with a very substantial expansion of total domestic credit during the decade; gross domestic credit rose at an average annual rate of 20 percent from SL 1,928 million in 1966 to SL 12,265 million in 1976. When gross domestic credit was offset by increased import deposits and other factors, net domestic credit expansion rose from SL 1,452 million in 1966 to SL 9,490 million in 1976--an average annual growth rate of 20 percent (Table SA 6.1). At the same time, the substantial accumulation of foreign exchange reserves contri- buted heavily to the growth of money supply at a faster annual rate than GDP. The rate of annual change in money supply (from Table SA 6.2) and in GDP at factor cost in constant 1963 prices for the period 1966-75 was as follows (change as percent of various years' total): Money Money Year GDP Supply Year GDP Supply 1966 -3 12 1971 7 8 1967 8 20 1972 9 26 1968 5 15 1973 0 20 1969 13 12 1975 16 26 1970 2 14 Mobilization of Savings 11.39 It should not come as a surprise that in Syria there is no tradi- tion of investment in such financial assets as bonds or government securities. The preference is and always has been for investment in tangible assets--com- modities and land. Foreign holdings and speculation attract some funds, but - 333 - such factors as the government's attitude toward the private sector, poLiti- cal instability, and inflationary tendencies have always been powerful deter- rents to investment in medium-term or longer-term liquid assets. Furthermore, the very lenient tax treatment of capital gains from speculation in land or buildings has been a strong incentive in recent years of rampant inflation to investing in real estate. 11.40 The preference for liquid assets brings up the issue of interest rates and their role in mobilizing savings. The function of interest rates in determining the level of savings has long been questioned on theoretical grounds. Income, peruanent income, wealth, and consumption have all been indicated as probably more determinant of savings levels than interest rates are. In the Syrian context, however, the role of interest rates in influencing the forms of investment preferred for savings may be more profitably discussed than their influence on aggregate saving. The annual interest rates--varying from 4.0 percent on demand deposits to 5.75 percent on time deposits of over 12 months maturity--remained unchanged from 1970 through 1975, and were generally lower than the annual increase in the wholesale price index (1962=100) or in the. implicit GDP deflator, as follows (in percent a year): Compound Annual Rate of Increase or Decrease July 1970 -End 1975 1970 1971 1972 1973 1974 1975 Wholesale price index 11.2 7.0 10.6 -5.2 32.6 14.0 7.2 Deflator for gross domestic product 17.7 1.1 10.4 9.0 7.6 46.7 19.1 As the return at these rates failed to keep pace with loss of purchasing power, the only motive for holding demand and savings deposits was to keep funds liquid for transaction requirements or to build up funds for investment in housing and consumer durables. In fact} at the end of 1975 postal savings deposits totaled only SL50 million and other savings and time deposits (exclud- ing foreign currency and restricted deposits) amounted to only SL400 million. 11.41 Admittedly, in 1969 and 1970 measures were taken to stimulate finan- cial savings. They in.cluded, among other measures: eliminating the 7.5 per- cent tax on irterest earned on savings and time deposits; ensuring the secrecy of bank deposits; and creating investment certificates. Finally, foreigners as well as nonresident Syrians were allowed to open transferable accoujnts denominated ir foreign currencies with interest rates comparable to tllose pre- vailing in international financial markets. These measures would probably have been somewhat more effective in stimulating saving had the rate of inflation 334 - not increased so much in 1973 and 1974. The failure to adjust the whole in- terest rate structure to the rate of inflation contributed heavily to keeping financial savings at a very low level 1/. 11.42 The investment certificates were an innovative step: they contain a lottery feature; can be used for payments to the government; and offer free interest rates ranging from 5.75 percent to 8.0 percent a year. Their volume increased from SL17 million in 1970 to SL120 million by the end of 1975. On the negative side, their small denominations prevent them from mopping up excess liquidity on a massive scale and their yield was relatively low con- sidering the inflationary conditions prevailing in 1973-77. 11.43 Parallel to the foregoing measures were the efforts made to build up the financial infrastructure by creating more bank branches. The spread of these branches is quite important as it broadens the base of the monetary sector, enhances the banking habit and naturally favors the monetization of savings. Discussion with representatives of the Syrian banking community indicated, however, that the scope for improvement in this area was still substantial. Apparently trivial problems like long lines at the teller's window and the time required to accomplish such everyday banking operations as making deposits or cashing checks can in fact be important in limiting the use of bank services. THE IMPACT OF INFLATION 11.44 It may be useful at this point to summarize the effects of inflation which have been touched upon in several parts of this report. Table 11.12 gives a number of different indicators for the measurement of inflation; it is reflected in the evolution of the wholesale price index, the retail price index, and in the implicit price deflators (rates of conversion to constant 1963 prices) for such national accounts aggregates as GDP, gross domestic capital formation, and imports and exports of goods and nonfactor services. Any discussion on inflation in a system where prices are by and large govern- ment controlled should be taken with great caution, as the effects of black marketing and other forms of repressed inflation do not come to the surface. Moreover any attempt to establish whether the sources of inflation are domestic or external is severely limited by the impossibility of determining the inter- relationship between domestic and foreign sectors. 1/ In contrast to the annual interest rates on deposits (4.0 percent on demand deposits, 4.5 percent on private sector'savings deposits, 5.0 percent on time deposits of 6 to 12 months, and 5.75 percent on time deposits of over 12 months), the interest rates on loans at the end of 1975 (from Table SA 6.8) ranged from 5.25 percent to 9 percent on loans made by the Commercial Bank; from 4.25 percent to 7 percent for the Industrial Bank; from 6.25 percent to 9 percent for the Popular Credit Bank; from 4 percent to 7.5 percent for the Agricultural Cooperative Bank; and from 5.5 percent to 7.5 percent for the Real Estate Bank. - 335 - Table 11.12: INFLATION 1966 1970 1971 1972 1973 1974 1975 1976 (est.) Wholesale Price Index 110 123 136 129 171 195 209 235 (1962 = 100) Retail Price Index 113 125 130 134 161 187 208 238 (1962 = 100) Implicit GDP Deflator 111.7 115.5 127.5 139.0 149.6 219.4 261.4 307.8 (1963 = 100) Implicit Gross 104.1 120.8 131.6 150.2 174.1 253.4 304.0 388.5 Domestic Invest- ment Deflator (1963 = 100) Implicit Exports of 98.2 99.5 112.7 128.6 149.4 319.5 333.4 363.4 Goods and Non-factor Services Deflator (1963 = 100) Implicit Imports of 94.0 95.0 106.0 121.0 123.0 194.0 208.0 262.1 Goods and Non-factor Services Deflator Implicit Terms of 104.5 104.7 106.3 106.3 121.5 164.7 160.3 138.7 Trade for Goods and Non-factor Services Sources: Tables SA 2B.6, and SA 6.9. 11.45 A look at the figures in Table 11.12 shows that the steepest: price increases took place in gross domestic investment which presents for the 1966-76 period an increase of 273 percent as against 175 percent for the entire GDP. Import prices increased slightly more (179 percent) than GDP and substantially more than either wholesale or retail prices. The fact that gross domestic investment had been hit by inflation much more severely than imports - and especially imports going directly into investment - would seem to indicate the existence of domestic bottlenecks as the major cause for the sharp increase in prices. At the same time, the fact that import prices have increased faster than the wholesale or retail prices is a reflection of the price support measure for a number of imported vital commodities. Impact on Welfare 11.46 The negative effects of inflation on income distribution are all too well known and have affected the Syrian low and middle income classes - 336 - essentially in the same way as in all other countries experiencing high in- flation rates. If one considers inflation a factor exogenous to the welfare function the extent of its damage may be assessed in terms of government poli- cies to mitigate its impact on lower income population. The steps taken proved to be inadequate, and the whole disrupting effect of inflation percolated throughout the low and middle classes. The only exception to this otherwise passive attitude was the subsidy scheme for vital commodities. The implementa- tion of the scheme, however, in providing the same level of subsidy to all income groups, had a negative impact on the distribution of disposable income both as to equity and because it failed' to reduce the purchasing power of the higher income groups in a period of inflation requiring a much sterner control of effective demand. 11.47 In another area--urban housing, softening the impact of inflation would have required vigorous action in urban centers, and especially in Damascus. Middle income classes, including the vast majority of government employees, are hard-hit by inflation because of the inadequate supply of decent moderately priced dwellings. Rents on new dwellings are beyond the reach of these people who would have to pay between 1.5 and 3 times the monthly salary of a senior civil servant for a minimum-standard apartment. This in turn is the result of a real estate rush favored by inflation which has made real estate subject to a very high degree of speculative trade. By leaving the huge capital gains from these speculations untaxed, failing to have a serious system of rent control, failing to allocate public resources for low-income housing or for upgrading existing substandard dwelling facili- ties, the government has shown a striking lack of social concern. 11.48 As noted earlier, current expenditure for health and education are two other areas in which inflation has brought about a decline in per capita supply of public goods. Hence the policymakers did not allow for the effect of inflation on budget allocations which had been formulated in advance on a yearly basis without consideration for the expected price increases. Because the previous year's allocations were not discounted for intervening inflation, additional programs implied a substantially lower increase in real terms even assuming constant prices. Impact on Public Savings 11.49 In the standard classical model, inflation has a prima facie posi- tive effect on the mobilization of fiscal resources for development through public saving, insofar as it may be supposed to reduce the real (constant price) value of the predetermined allocation for expenditure more than it reduces that of revenue yield. Budget appropriations are normally determined in advance, once and for all for the entire year; inflation reduces the real value of that part of expenditure not automatically responsive to price increases. In contrast, revenue yields are normally supposed to increase: in direct proportion to inflation in the case of turnover taxes, customs duties and other ad valorem levies; more than proportionately in the case of progressive income taxes; and less than proportionately in the case of special levies (by weight) and property taxes. Property taxes are based on an assessment of real estate values which at best can be made only every three years, given the administrative complexity of the operation. - 337 - 11.50 Let us now examine Syria against this simple model. On the expendi- ture side the framework would seem to work in the classical way, except for the large role of spending on price support and defense. For these components, given their ;-portance, it is unlikely that sizeable loss in purchasing power in the course of the budget year will be passively accepted; supplementary appropriations are not improbable. To this extent, inflation reduces real current expenditures less than it would in a system with comparable inflation rates but a much higher defense budget.' As to the element of imported infla- tion resulting from increased import prices of vital commodities, there is an automatic cost-push element in the budget which is directly related to a non- controllable variable, unless government decides to change its policy. It should be noted that the subsidy scheme is not only a drain on domestic resources but also on foreign exchange resources, and unlike other imports, the vital commodities cannot be exploited for revenue by raising import duties. 11.51 On the revenue side, the specific Syrian tax mix makes the system less responsive to inflation than the standard model suggests. For one thing, real estate values, the main contributors to the current inflation, are lightly taxed under the property tax and totally untaxed for capital gains. Sebcond, direct withheld taxes on wages of government employees have not increased more than the rate scale implies because wages have remained practically unchanged for quite a few years. Third, tax evasion by the self-employed, including tradesmen and small private businessmen, has been high while their incomes have kept up with inflation. Fourth, the absence-of general sales taxes and the reliance on specific taxes on various products has made the system rather unresponsive to inflation, as specific rates are not promptly adjusted to the general inflationary tendencies. Fifth, the exemptions provided for a sub- tantial share of increasingly more expensive imports have caused a substantial loss of potential revenue without the possibility of recovering it through domestic indirect turnover taxes. The outcome of all these features is clearly in the sense of a net loss in resource mobilization by the govern- ment as a result of inflation. N 11.52 It has already been noted above that inflation tends to discourage the propensity to purchase financial assets or to hold savings account:s, thus interfering with the mobilization of private savings and `ntermediation to channel them into priority investments. It may be added here that in 1966-76 the governmen; did little to offset even partially the disincentive effect of inflation on financial savings. The disorderly development of high-income urban dwellings was the main competitor for resource savings. This not only had a negative effect on the distribution of assets but channeled savings into a very low-priority kind of investment. MEDIUM-TERM PROSPECTS 1/ 338 - 11.53 A detailed discussion of the immediate prospects for resource mobil- ization and investment as embodied in the 1977 budget estimates, as well as of the medium-term outlook for 1978-85, is to be found in Appendix llA to this chapter. Here the main elements of the discussion may be briefly reviewed, focussing on the problems that face the Syrian authorities. The projections for the medium term in Table 11.13 are not intended as forecasts, but only as illustrating one of several possible scenarios. Their purpose is essentially to quantify the measures that will be required on both the revenue and the expenditure side of the budget given the basic constraints constituted by defense expenditure and the decline of oil revenues. Table 11.13: PROJECTIONS OF PUBLIC SECTOR SAVINGS, INVESTMENT AND OVERALL DEFICIT (SL millions) 1976 1977 1980 1982 1985 At current prices Savings 756 22 1,300 1,500 3,200 Investment 5,212 6,000 6,500 8,000 12,000 Overall Deficit 4,270 5,978 5,200 6,500 8,800 At 1977 prices Savings 22 1,000 1,000 1,700 Investment 6,000 5,000 5,000 6,500 Overall Deficit 5,978 4,000 4,000 4,800 As % of GDP at factor cost Savings 3.2 0 2.9 2.5 3.7 Investment 21.9 21.0 14.0 14.0 14.0 Overall Deficit 17.9 21.0 11.7 11.0 10.0 Defense Expenditures 15.2 14.0 12.0 12.0 12.0 Total Revenues /a 12.5 11.0 15.5 17.5 19.0 /a Ordinary budget revenues (tax and non-tax); does not include transers from public enterprises. Source: World Bank Projections: see Chapter 11, Appendix 11A (Scenario C). The 1977 Budget 11.54 The 1977 budget reflects the weaknesses in budgeting practice. The estimated surplus (public saving) provided for the current budget is 1/ This discussion is based on projections made, in early 1977, and has not been revised to incorporate actual developments since then. - 339 - practically nonexistent, as recurrent expenditure is projected to increase by 11 percent over 1976 and revenue is expected to decline because of for- tuitous factors like the elimination of pipeline dues and an anticipated decline in the surplus of public enterprises resulting from a fall in the foreign exchange profits of the banking system. At the same time, however, invetment spending on the capital budget was set at SL1O.4 billion, double the amount actually spent in 1976. This would imply an overall budget deficit equivalent to more than 20 percent of projected GDP. 11.55 The lack of realism of the 1977 budget exercise is confirmed by the fact that it designated foreign loans in the amount of SL2.3 billion as the sources of financing for an overall deficit of SLIO billion, the remainder apparently to be covered in some way or other. The investment estimate of SL6 billion for 1977 given in Table 11.13 is the mission's revised estimate, intended to introduce a realistic note into the proposed scenario. In the original 1976 budget estimates projected investment had already been set at SL 10 billion, but the actual level reached only SL5.2 billion. The short- fall is attributable not to limited absorptive capacity, but to unrealistic planning. In 1977, even using the mission's reduced investment estimate of SL6 billion, the overall deficit would be equivalent to 21 percent of GDP, exceeding any ratio of the preceding ten years. It is very likely that only a further reduction in the investment level (below the SL6 billion estimate) can bring about a more easily absorbable overall budget deficit. Projected Public Finances, 1978-80 11.56 Scenario A in Appendix A to this chapter gives a detailed projection of public savings, investment, and the overall budget deficit for 1977-82. This scenario would yield an unacceptably inflationary overall budget deficit equivalent to 21 percent of GDP by 1982. It is based on: (a) the investment level foreseen by the Fourth Five-Year Plan 1976-1980; (b) the tax revenue level resulting from the built-in elasticity of the tax system (see Appendix llA); (c) public enterprise surpluses reflecting the expected decline in oil revenue; and (d) defense expenditure decreasing from 15 percent of GDP in 1976 to 12 percent in 1980 and 10 percent in 1982. This would still leave the overall deficit of 21 percent of GDP by 1982, clearly an unacceptable level in terms of implicit inflationary pressures. Assuming an increase of 6 percent a year in GDP at factor cost and built-in tax elasticity of 1.3, tax revenue would increase at about 8 percent a year. This assumes strong action by the government in improving tax administration and reducing tax evasion. The collective net surplus of public enterprises would decline from SL3.5 billion in 1977 to SL2.3 billion in 1982. This projection also assumes that current expenditure, excluding defense and price subsidies, will increase at the same rate as GDP, and that subsidies for vital commodities will decline gradually from the SL600 million budgeted for 1977 to SL200 million in 1985. - 340 - 11.57 A second scenario has been formulated based on the maximum feasible tax effort and maintaining all the other assumptions unchanged, except for defense which is held at 12 percent of the projected GDP after 1980. The maximum revenue effort has been arrived at by simply raising the revenue ratio from 11 percent in 1977 by two percentage points per annum up to 1980, when it reaches 17 percent of GDP. In this alternative the overall deficit would remain at 15 percent of-GDP from 1979 onwards. The postulated increase in revenue, however, does not seem to be within reach of the government, espe- cially when translated into required annual growth rates. Tax revenue would have to increase by 24 percent in constant prices and this is already a very ambitious target, which becomes practically unattainable when one considers projections in current prices. Assuming inflation rates of 17 percent in 1978, 16 percent in 1979, 15 percent in 1980, and progressively declining thereafter to 10 percent by 1985, the growth rates required in tax revenue would be in the order of 50 percent in 1978, 40 percent in 1979 and 35 percent in 1980. 1/ This effect is due to the following factors: (a) profit taxes tend to lag behind the price increase-as a result of the time-lag between their.accrual and their taxation; (b) property taxes will lag just as much unless reassessment of the value is conducted; (c) all specific excises such as that placed on tobacco also tend to lag behind inflation unless ad hoc price increases are determined. (Table 11A.8 of Appendix llA shows the elastic- ity of the Syrian tax system assuming various rates of infla- tion. It shows that in contrast to the built-in elasticity of 1.3 at constant prices, elasticity reaches a low of 0.7 with 20 percent inflation and a maximum of 0.97 with an 8 percent inflation rate.) 11.58 The remarks on the two preceding scenarios have led to the formula- tion of a third illustrative scenario which is summarized in the last table cited (Table llA.8) and which is based (a) on a reasonable increase in revenue from 11.0 percent to 15.5 percent of GDP between 1977 and 1980; and (b) on a sharply reduced level of public investment from 21 percent of GDP in 1977 to 14 percent in 1980. This reduction might appear less dramatic if one con- siders the possibility of a shortfall in investment even with respect to the 1/ The relationship between public investment and inflation is explored in Appendix llB, through a simple macroeconometric model. The results (Table llB.4) suggest that an investment program as foreseen in the Five-Year Plan (corresponding to Appendix llA, scenarios A and B) would correspond to inflation rates of 17.5 percent (1978), 16.3 percent (1979), and 16.0 percent (1980); alternatively, if investments were reduced from the SL 30 billion Plan level to around SL 25 billion (cor- responding to Appendix llA, Scenario C), the projected rates of inflation would be 17.2 percent (1978), 15.7 percent (1979), and 14.9 percent (1980). (See Table 11B.4 in Appendix llB.) - 841 - mission's revised estimate for 1977. In this scenario the overall deficit would decline from 21 percent of GDP in 1977 to 13 percent in 1978 and 11 percent by 1980. The realization of such a scenario would still require a very substantial increase in tax revenue for 1978. The only alternative to this would be a substantially higher deficit; given the weight of ongoing projects in the plan investment package. It is not conceivable that irLvest- ment might be further reduced in such a short time. Appendix Table 11A.9 illustrates the ad hoc rate increases which would be required to bring reve- nues from the expected level (based on their built-in elasticity with 17 percent inflation) to the target level. On the average the additional increases should be of the order of 19 percent, not an unattainable target. 11.59 To conclude, one should stress again the illustrative nature of the projections presented above. Among the main facts emerging from these scena- rios is first, that an increase in tax revenue is very much needed and the "reasonable tax effort" postulated in scenario C would still leave the ratio of taxes to GDP in 1980 substantially below the potential tax effort of Syria; the only reason a much higher effort has not been postulated is that it is not realistic to expect very sharp tax increases in a relatively short time. Second, investment will have to be reduced with respect to the original plan target unless new oil discoveries intervene to ease the financial constraint on the economy. The possibility that the assumptions concerning domestic oil consumption which are the basis of the projections for enterprise surpluses might be pessimistic could mean a somewhat more favorable picture for public savings, but only in the short term. RECOMMENDATIONS: FISCAL POLICY 11.60 Syria's short-term problems of public finance are at present of greater urgency than the longer-term view required by the nature of thais basic economic report. The scenarios presented indicate very clearly that if the financial picture deteriorates further in the two years 1977 and 1978, rampant inflation could bring development expenditure to a halt, making con- ditions worse for the middle and low income groups and throwing the country into a very difficult situation. The scenarios have also shown possible ways of redressing the economic situation of the country by strict belt-tightening measures involving a sharp increase in revenues and the reduction of invest- ment. It should be noted that in these scenarios allowance is made for current budget expenditure to'expand at the same rate as GDP, with special provision for defense expenditure. It was felt that both because of the built--in rigid- ity of current expenditure and because of the need to expand certain kinds of social and economic services it would be more realistic and advisable to cut investment expenditure. The Size of the Public Sector Investment Program 11.61 The issue of investment expenditure is likely in the near future to become one of the most controversial. Unless huge amounts of foreign aid should be made available on reasonable terms it appears impossible to con- tinue with the rates of investment of the 1973-76 period. The number of ongoing projects is large and some (especially the Euphrates irrigation scheme) are--at least on paper--investments very necessary to the future growth of the economy. It is difficult, not to say impossible, to reduce the 3- 342 - overall level of capital expenditure without cutting into such vital invest- ments, particularly as investments in certain other activities such as chemi- cals and construction have priority for national security reasons. At the same time an economic and social ranking of ongoing projects is very difficult to obtain as many of these projects have not been preceded by feasibility studies of any reliability. Furthermore, there is no guarantee that some of the new projects contemplated under the 1976-80 plan may not be of higher priority than certain ongoing projects. It is not enough, in these conditions, to recommend cutting investment--a necessity which by now can scarcely come as a surprise to the Syrian Government. An attempt to indicate a prima-facie priority ranking of both ongoing and new projects is provided in Chapter 13 (Towards a Development Strategy). This list is set against the overall ceilings indicated in the chosen scenario. 11.62 The problem remains of how to go about stopping or delaying ongoing projects to remain within an overall expenditure ceiling. An obvious criterion would be to have the axe falling on the more capital-intensive investment in order to create employment, minimize costly equipment imports, and -conserve foreign exchange--a very scarce resource in the present. and near future. Investments in the chemical industry, for example, are by definition capital- intensive. 1/ Unfortunately, investment in irrigation involving such large- scale infrastructure as dams or canals is also capital-intensive, although more for economic reasons than, as in the chemical sector, for technical reasons. The choice between equally capital-intensive projects should be based upon the overall growth strategy priorities. In addition to less capital-intensive projects, there are areas of intervention where smaller amounts of spending can generate fairly quick returns and provide a natural short-term substitute for the more capital-intensive project whose produc- tivity is deferred into the more distant future. In agriculture, for example, one should not underestimate the yields of improved rainfed irrigation or the potential of recurrent expenditure on extension services. 11.63 One thing is extremely important in this perspective of delaying or stopping investment; there must be planning to avoid the operation being costly in direct terms as well as in terms of deferred productive capacity. The lesson of experience of public programs which cannot continue because there is unexpectedly no longer any money, should be kept in mind--the waste involved in machinery lying idle and not maintained, in unfinished construc- tion, or even worse in unequipped construction (hospital, schools) can be avoided with a minimum of programming. If the government avoids spreading its expenditure thin over a number of projects which would then have to be stopped, even in times of expenditure control, it can have a few projects completed rather than no projects at all. 1/ An example from another country: the failure to increase employment in the depressed areas of Southern Italy was to a great extent the result of concentrating incentive-attracted investment in the petrochemical and refinery industries. - 343 - Current Expenditure 11.64 The main thrust of the fiscal policy strategy for the short and medium term should be on increasing revenue and reducing investment, but current expenditure will also require special attention to keep its overall expansion in line with the growth of GDP while increasing given components. Defense obviously remains the great unknown of current expenditure; the various scenarios assume that recurrent defense expenditure will decline from 14 percent of GDP in 1977 to 12 percent in 1980 and thereafter will expand at the same rate as GDP. If defense expenditure is not reduced, but remains at the 1977 level, the difference will have to be made up by further reduction in the investment effort, unless grant aid from other Arab countries can pay for any additional defense bill. 11.65 In the absence of external aid, the decision to maintain investment, even at the lower level indicated in the scenarios while at the same time, increasing defense expenditure will inevitably originate inflationary pres- sures of a magnitude which will disrupt income distribution to the detriment of the low and middle income groups. In the Syrian situation the idea that maldistribution of income is a function of the initial distribution of assets is strikingly illustrated in the area of housing. With rents soaring, espe- cially in large urban centers like Damascus, the only middle class elements that can survive inflation are those who own their house or apartment. The others are faced with the choice of having to devote more than half of their income to renting small units and thus descend precipitately into the low- income ranks. 11.66 After defense, education is the single largest component of current expenditure. As indicated in Table 11.10, current expenditure for education declined in real per capita terms between 1966 and 1976 and capital expenditure on education increased only in 1975 and 1976. The need to expand education expenditure is clear and Volume 3, Annex 4 (Education) makes a clear case for it with very precise indications as to the content of the package. Budget policy must also keep in mind the priority of this expenditure. Inflationary pressures could easily mean that the growth of expenditure on education in terms of real purchasing power could slow to less than the GDP growth rate which should be the minimum rate considering the increase in population. In fact, the various scenarios project a very modest increase in per capita allocation for education. More should be given but other equally important priorities--health, price subsidy and economic services--together with the overall financial constraints do not leave much room for larger allocations. 11.67 Expenditure on health and other social services has also declined in real terms. The government cannot let this trend continue especially since the global amounts involved are already very low. In addition, there is a problem of distribution of health and social services between urban and non-urban centers. There is scope for substantial improvement in the organi- zation of the health services. For example, more attention should be given to the creation of lightly equipped dispensaries which can cope with a great number of health situations and can be distributed more widely in the country. - 344 - A program for disease prevention requiring substantial current means is also a priority to be considered. Say's law of supply creating its own demand is very much typical of the health sector and operates in a perverse manner: the creation of heavily equipped hospitals whose efficiency is measured in number of beds creates a population of bed-recovered people regardless of whether they actually require this very expensive form of care. Unless lightly equipped hospital units are scattered, routine tests and care neces- sitate admission to hospitals for it would be hard to conceive of people moving in and out frequently from long distances. 11.68 Price subsidies are to be considered an exogenous constraint espe- cially when related to prices of imported goods. There has been detailed discussion of the whole subsidy issue in Chapter 6 and earlier in this chapter. From a budgetary viewpoint one should take the position that it would not be realistic to expect price subsidies to decline rapidly over time. The social implications are too obvious. A strong case, however, should be made for having the system less regressive than it is now. There is no justification for middle and higher income groups receiving the same subsidies as the poor. This makes the program more expensive or less efficient than it should be; if fewer people were to benefit from it, either a reduction in the total amount of subsidies or larger per capita subsidies to the poor could be obtained. A food stamp program could be adopted to solve the problem. No one denies its administrative difficulties but this is not a good enough reason for continuing with a system which is unjust and inefficient. 11.69 Current expenditures on economic services require a different strategy for the future. Transportation, especially roads, and agriculture, especially irrigation schemes, represent the two critical sectors. In- sufficient maintenance of the road system is not exclusive to Syria but this does not make the problem less serious. Furthermore, this is the expenditure item which is most frequently the victim of inflation. It has low built-in priority for public expenditure; its budgetary allocations tend to increase very moderately over time and can be eas'ily eroded by inflation. 11.70 The same is more or less true in agriculture, where the problem is aggravated by the inefficient organization of services. Syria is at the beginning of a major effort in irrigated agriculture in which the first step-- building dams and canals--is costly but relatively easy. For the equipped lands to be brought under irrigation in a productive manner, preconditions will include well-organized systems of extension services and credit; dis- tribution of the right inputs; and well-coordinated price policy. Failure to provide the required structures could mean failure of the entire irriga- tion program; accrual of the anticipated benefits could be deferred for as much as ten years beyond the original targets (as experience in Tunisia and Southern Italy has demonstrated). Another critical aspect of the irrigation program is maintenance of existing canals. As the Egyptian experience has demonstrated, productivity of reclaimed land can soon deteriorate unless the - 345 - water distribution network is adequately maintained. This is an area where marginal tradeoffs between current and capital expenditure to the advantage of current allocations can quite substantially improve the rate of return. Tax Reform 11.71 The main burden of the badly needed improvement in the public savings performance must fall on the revenue side, as has been clearly indicated in our three scenarios. The revenue effort resulting from the built-in elasticity of the tax system will not be sufficient to generate the required addit:ional resources. In the current state of the Syrian tax system, attainment of the built-in elasticity target would already present serious difficulties. First, the revenue structure is not responsive to inflation; second, tax administra- tion problems tend to further reduce the responsiveness of the revenue struc- ture to the growth of the tax base. The need to increase future revenae substantially beyond the built-in elasticity level subjects tax administration to a pressure which (if no action is taken) can only result in failure to attain the targets. 11.72 Tax Administration. Syria's tax administration suffers from a num- ber of shortcomings which are common to many other developing countries and which basically reflect the implicitly low priority given by governments to this public function. Personnel and equipment are totally inadequate to meet the tasks of efficient tax administration. Information on taxpayers :.s scanty and collecting it is left to the initiative of tax inspectors. Control of tax returns is extremely slow and it takes years before they are examined. Penal- ties for tax evasion are heavy on paper and light in practice. Until 1976 tax evaders were subject only to fines. As of 1977 they can be taken to court but it remains uncertain how seriously this procedure will be applied. When there is no tradition of jail sentences for tax evaders, it takes quite a while before the system, including the courts, accepts this form of penalty. Smuggling to evade duty on excise tax is standard and heavy practice. What is the use of sophisticated tariff struIcture revisions when the hidden part of the iceberg is so large? 11.73 In any system taxes are called upon to generate resources i-or public needs while ensuring an equitable distribution of the tax burden and thus con- tributing to a better income distribution. When tax administration is as weak as in Syria, equity is a permanent loser and its prospects can only become worse when increases in taxes are expected. Again, efforts are oftea concen- trated on ensuring what one may call a formally equitable tax system with its progressive rates on direct taxes, higher discriminatory rates on imports of luxury consumption goods, appropriate family allowances, and wealth taxes. But then, as in Syria, only wage and salary earners pay their full taxes. The self-employed contribute very little to the common fund, as their exterior signs of wealth show--beautiful and expensive cars, luxury houses, expensive beverages and restaurants. All this, in a country which is supporting a very heavy burden for its defense, and has to meet the additional burden of price subsidy for vital commodities, clearly indicates the urgent need to start using the tax system more efficienctly as an income redistributing mechanism. - 346 11.74 There are, however, signs of improvement in this area of management of public finances. For example a major ongoing project--carried out by French consultants--aims at putting the administration of profit taxes on a modern computerized basis which will provide a census of taxpayers with basic information on their position vis-a-vis the tax administration. The project is sound in its basic formulation, although a more simplified formulation of the kind of information to be treated might have been preferable, and its implementation schedule (the target date was January 1978) is perhaps too ambitious. But the real question is whether the government is willing to implement it effectively by making sure that all necessary inputs are provided. The Department in the Ministry of Finance which has provided this project is following it up with the greatest possible attention and effort, but for the project to succeed the coordinated efforts of other ministries and other departments in the Ministry of Finance are of vital importance. Only a genuine interest in this reform by the higher authorities can ensure its success. 11.75 This interest has to be translated into an increase in the personnel and equipment allocated to tax inspection and collection. The quality of this personnel will be as important, if not more important than its number. Uni- versity graduates are often allocated to the Ministry of Finance and then abandoned to the system, which provides no stimulus for efficient work. Peri- pheral offices are often understaffed and lack appropriate space or facilities. These apparently trivial problems are in fact the clear signs of a weak tax administration. 11.76 Equity and Efficiency as Tax Policy Targets. In a perspective of sharply increasing tax effort like that recommended for Syria, the concept of target groups commonly used in the context of income redistribution can profitably be applied in the formulation of tax policy. The two objectives of tax policy are equity and efficiency in raising revenue. The first objec- tive calls for identifying the income groups from which a marginally larger contributing effort should be required. The second objective requires the identification of the tax base that can most promptly provide the greatest additional revenue. Conflicts often arise between the two objectives and the more acute they ate, the greater the tax evasion by income groups called upon to provide the more significant contributions. The conflict is further aggravated by inflationary pressures which in a framework of substantial tax evasion make efficiency in collection prevail over equity. When, as in Syria, a number of taxes do not increase their yield in relation to inflation because of the way they are assessed, the further problem arises of making continuous rapid adjustments in prices, fees or tax rates. In the process the tax-evading higher-income groups enjoy an increase in real income which is by definition regressive. 11.77 From the standpoint of equity, the Syrian tax system should first of all focus on improving collection from the self-employed, such as lawyers, doctors, dentists, or financial and commercial consultants. These are mostly professionals who can more or less fix the prices of their services and thus rapidly adjust their income to inflation while significantly evading taxes. As it would be naive to expect any sudden major improvement in tax administration, the only solution is to concentrate existing collection - 347 resources on these groups in a once and for all effort for the coming two fiscal years. This operation cannot be successfully conducted without a thorough examination of the living standards of these income groups. Informa- tion of this nature requires a close and thorough look whic' - costly in terms of personnel and equipment. A second target group for improved collec- tion consists of tradesmen; their profits, often considerable, are relatively more easy to identify, as they are required to have a minimum of accounting procedures. A third target group consists of private industrial businessmen, who operate on a relatively small scale in Syria because of the prevaiLing fear of nationalization. Their profits, again, are relatively difficult to conceal because their activity can be measured in terms of such factors as machinery and workers employed, or prices applied. Finally, there is a group not located in any specific professional or business activity of those who deal on a speculative basis in the purchase and sale of land and buildings. This group is the one making the largest untaxed profits in a situation of absolute insufficiency of low-cost and medium-cost housing, and represents the worst example of income maldistribution. Measures to solve this problem are examined below. 11.78 From the standpoint of efficiency, the measures recommended above will not generate any very substantial additional resources in the short run. Additional revenue from direct taxes will have to be obtained by increasing rates, and the most efficient way is to impose a percentage increase ito be paid within the year or. taxes not paid for the previous year, say 1977. This might reduce the scope for additional tax evasion which normally accompanies any increase iri tax rates. But the real problem of efficiency arises, as mentioned earlier, in a number of the indirect taxes now existing. The longer-term solution is the introduction of a sales tax (see below) but the short term prospect has to rely on adjustments of present taxes. A further increase in the gasoline tax should be considered. For reasons of both equity and efficiency, productive and domestic uses should be taxed at different rates. It is a good opportunity to make the high income group pay for what is basically a luxury in the present hard financial situation of the country. Car fees should automatically follow for the same reasons. Cigarette prices should also be substantially increased; the increase should be lower on the lower-priced brands. The same is obviously true for alcoholic beverages. Rates of stamp duties on contracts, which are often the vehicle for untapped revenues and are elastic to inflation, should be raised considerably. The whole spectrum of imported consumer goods should provide the basis for increases to be concentrated on those products which are clearly consumed by the higher income groups and for which price elasticity is rather low. In fact, from an equity view point the existence of a price subsidy scheme which in its present formulation benefits the middle and higher income groups requires that additional levies be put on those products which are almost entirely consumed by the rich. 11.79 Finally, there is the matter of raising rates for public trans- portation and public utilities (electric power, gas and water). Here, effi- ciency and equity come into conflict because of the administrative difficulty of implementing a rate schedule which is progressive with respect tco income. - 348 - Rate increases for public transportation affect low and middle income groups in the same way; higher income groups make relatively little use of public transportation but can be reached through gasoline taxes and car fees. For water and electricity it satisfies the equity requirement if standards of consumption for types of house-dwellings (low and high income) are first established, and consumption above a certain Level is heavily taxed (through a two-tier rate). This would still provide the higher classes with a minimum of cheap and unjustified use of public utilities. 11.80 Recommended Changes in Tax Structure. In addition to improving the tax administration and increasing the rates of most taxes to solve short-term financial problems, attainment of the equity and efficiency targets will require more permanent changes in the structure of the tax system. These changes cannot be immediately implemented, but beginning immediately should be considered, studied and eventually translated into tax laws. The three main targets for reform should be income taxes, property taxes, and sales taxes. There has been for some time a tax reform committee which is supposed to study changes in the tax structure, but so far little work has been done. 11.81 A fairly surprising feature of the Syrian tax system is the absence of a progressive general income tax paid by individuals. 1/ Under the present system, those who are not salary or wage earners (and thus subject to the graduated withheld tax) pay the same progressive profit tax which is assessed on commercial and industrial activities. Its rates are graduated from 10 percent on the first SL1O,000 to 52.5 percent on profits exceeding SL750,000. It is subject to the classical objections that it discourages expansion of business activity and runs contrary to normal corporation tax practice. 11.82 Consideration should be given to introducing the kind of personal income tax which is a widely accepted feature of most tax systems and the best way of assessing the overall taxable capacity of individuals. Syria, with its per capita income and overall social and economic structure is cer- tainly not at the bottom of the list of,developing countries and seems to have no reason for not having a more modern tax system. In a period of finan- cial difficulties which may persist for quite some time and which requires citizens to contribute their utmost to the common welfare, a personal pro- gressive income tax is to be recommended for its equity and efficiency. 11.83 Its implementation should be gradual in order to reduce the admin- istrative difficulties involved. It should call for tax returns from those whose income is above the first bracket of the wage and salary tax, thus avoiding an unnecessary effort by a large number of taxpayers who would not contribute much anyway. The purpose of the tax is in fact to "educate" in a fiscal sense those in the high, middle, and upper income brackets. It is very important that the rates should not be so exceedingly high as to induce 1/ A general income tax was in fact introduced into the tax system in 1961, but was never put into effect. Its rates ranged from 8 percent on in- comes from SL10,000 through SL15,000 to 90 percent on incomes exceeding SL100,000. - 349 - further tax evasion; the target should be a large tax base, and this can be obtained only through moderate rates not exceeding 70 percent on the highest income. Clearly, the introduction of a general income tax should entaiL a revision of the rate mechanism of the profit tax and lead to the determina- tion of a standard rate of tax on profits regardless of size--say about 40-50 percent including defense surcharges--with all appropriate sector and profit level deductions. The profit tax computerization project currently being executed by the French consultants could in fact provide a good basis for the identification of taxpayers to be subjected to the new individual income tax. It goes without saying that much time and administrative effort will be required to implement the changes in the tax structure proposed above, as well as those discussed below. It should be possible to introduce the general income tax in the 1979 budget. 11.84 The need for property tax reform hinges on the fact mentioned earlier that neither the existing Syrian property tax nor the property trans- fer tax is apt to capture the high speculative capital gains-on transactions in land and buildings made possible by inflation, scarcity, and pent-up demand. One should therefore consider some form of taxation of these gains at rates high enough to discourage land speculation or at least to tap some portion of its profits. An example of suitable rate structure is provided by a tax on capital gains from building and land transactions introduced by Tunisia in early 1976 to cope with similar problems. 1/ 11.85 Effective implementation of such a tax would require a good cadas- tral system to facilitate following the various transactions as land and build- ings change hands. Tax officials could rely on current market values to avoid gross evasion attempts such as agreement between the parties to a transaction to underdeclare the value of the assets involved. The rate structure could be made into a more continuous curve than in Tunisia, with even higher rates for the first year. It is not intended here to provide a complete tax proposal, but rather to suggest that despite the technical and administrative d:ifficul- ties involved such a tax should be introduced as early as possible, and not later than in the 1979 budget. 11.86 The structural change to be considered in the area of indirect taxa- tion is the introduction of a general sales tax to replace the existing excise taxes on given products. One reason for this reform has already been identi- fied in the greater responsiveness of sales taxes -to the increase in nominal GDP. A second reason is obviously the possibility of covering a larger spec- trum of products within the same standard administrative regulations. At first the tax could be assessed at the wholesale level to avoid imposing an excessive I/ The Tunisian tax covers transactions in land and buildings and includes donations, except for those to family members. The rate declines in inverse ratio to the number of years the property has been held: it is 30 porcent for property sold in the first five yrars; 25 percent in years six and seven, 20 percent in years eight And nine, and 15 percent for years ten and beyond. - 350 - administrative burden on retailers. The rates can be differentiated on the basis of income distribution considerations and should start from a minimum of 5-7 percent. The upper limit, as in the case of alcoholic beverages and tobacco, could very well be in the 50-70 percent range. Excessive differen- tiation is not advisable because of administrative problems. Exemptions could be considered for some basic foodstuffs, basic pharmaceutical products, news- print, and paper for magazines and books. 11.87 Once a sales tax is introduced, the next objective could become the adoption of a value-added tax. The advantages of this form of taxation are known: the burden on the consumer is the same regardless of how many stages the products go through; the tax is neutral in regard to vertical integration since taxes paid on inputs are deductible from taxes paid on sales; and tax evasion is greatly reduced since each tax-payer has a strong interest in de- ducting taxes on his purchases. Although the administrative complications of such a tax, if widely applied, are considerable, it would be interesting to consider its application to services by self-employed lawyers, engineers, and the like, with the purpose of reducing their tax evasion. Since the recipient of these services could deduct the tax from his own tax liability it would reduce the number of unregistered transactions. It remains true, however, that value-added taxation in Syria is by and large a matter for later consid- eration. RECOMMENDATIONS: MONETARY POLICY 11.88 Our analysis of past monetary and credit developments has identi- fied two main problem areas: the role of monetary policy as an instrument of demand management separated from fiscal policy; and the role of interest rates as signals for resource mobilization and allocation. The issue for the future is not so much what should be done, as the answer clearly emerges from the problem itself, but rather what progress can be made in these areas, given heavy government control of the economy. The Role of Monetary Policy 11.89 Strengthening the role of the Central Bank would seem a necessary step to bring about a system of checks and balances certainly conducive to a better demand management policy. One of the most serious problems is the "license to borrow" granted to public enterprises coming under the Ministry of Economy, which in turn is the most powerful controller of the Central Bank. A solution could be to (a) make the Governor of the Central Bank directly responsible to the Deputy Prime Minister for Economic Affairs; (b) place him on the Economic Committee; (c) strengthen his influence over the banking sys- tem by making him Chairman of the Advisory Council of Banking, where he has hitherto served as a deputy to the Minister of Economy. Although one should not place too much confidence in this kind of change, it does seem to be a necessary precondition for a clearer assignment of roles. Naturally, the banks should also be submitted to the same authorities as the Central Bank to prevent a negation of the reform, as might happen if the commercial and other banks remained under the control of the Ministry of Economy. - 351 - The Role of Interest Rates 11.90 Given the role of the public sector in Syria, which is and will be for years to come a dominant one, it seems rather futuristic to wish for the use of interest rates as a signal for the allocation of credit between the public and the private sector as well as by economic activity within each sector. However, assigning credit by direct allocation will not prevent interest rates from functioning as a signal of efficiency if public as well as private borrowers are obliged to actually pay the interest. The cost of money can very well find its role as a measure of the return on investment even in a controlled economy. Moreover, there is no reason why public enter- prises should pay business taxes, as they do, and not pay interest, as well as repay the principal, on their loans. All this may not amount to more than the injection of some discipline into public sector relations with the bank- ing system, but financial discipline is a good prerequisite for any ambitious growth target. 11.91 At the same time, as interest is only one of the price signals that determine resource allocation in the economy, it would be meaningless to aim at restoring the function of interest rates without reconsidering the whole structure of relative prices. For the interest rate to function as a measure- ment of the efficiency of the borrowers it is necessary to bring it into line with the prevailing increases in prices. As long as interest rates provide only a negative return, lower than the annual rate of inflation, it does not make any sense to talk of efficiency signals except in relative terms,, since even negative interest affects enterprises differently depending on their respective economic and financial positions. An increase in interest rates is not welcomed by everyone in Syria, the basic fear being its inflat:Lonary impact. At the root of such an attitude is failure to perceive that an increase in the cost of money is, by and large, one of the steps requLred to reduce the level of excessive demand; for instance, with the two-digit infla- tion rates now existing in Syria, one-digit interest rates make borrowing for real estate speculation extremely attractive, leading to further inflationary pressures. Furthermore, if increases in gasoline prices, public transporta- tion and utility rates, excise and other taxes are to be considered necessary austerity measures, why exclude increases in interest rates? 11.92 It is not easy to determine whether interest rates can be effec- tively used to mobilize savings, or rather to channel the private savings of individuals into financial assets instead of other forms of investment such as tangible assets, foreign bank accounts or speculation (see Mobilization of Savings, this chapter). An increase in interest rates on demand and time deposits and on development certificates or similar securities--a measure which would have to be preceded by an increase in interest on loans--would certainly have a positive effect. Its impact would be limited, however, as long as (a) an inflation rate of more than 12 percent a year is expected; (b) alternative, often speculative, forms of investment remain more profit- able because they are not adequately taxed; (c) expensive consumer durables are within reach of the higher income groups; (d) middle class incomes are - 352 - eroded by inflation, leaving little if any room for discretionary (non- contractual) savings; and (e) public enterprises cannot come into the market issuing shares or bonds. In other words, the propensity to invest in finan- cial assets is determined only to a very limited extent by interest rates; increasing this propensity would require a large number of reforms and other changes which go well beyond the area of monetary policy. 1/ 11.93 The policy of extending bank branches must be pursued with great effort. As an alternative to the usual strategy of establishing relatively large and separate units, it might be more efficient, especially in smaller towns and rural areas, to create service centers that would include a post office, savings boxes and banking services. The specialized banks (such as the Agricultural Cooperative Bank) should also consider participation in such service centers. 1/ Introduction of bonds indexed to the cost of living might further expand demand for financial assets but in the. opinion of Syrian banking offi- cials is very unlikely to bring about any dramatic changes unless condi- tions improve. Furthermore, indexed bonds have an obviously higher cost to the government and introduce an element of automatic rigidity into current expenditure. - 353 - CHAPTER 11 APPENDIX 1lA PUBLIC FINANCES: MEDIUM-TERM PROSPECTS (DETAILED ASSUMPTIONS) 11A.O1 This appendix provides the detailed assumptions and analysis Df future prospects, which underlie the discussion in Chapter 11. THE 1977 BUDGET 11A.02 The immediate prospects for the Public Sector Finances on the, basis of the 1977 budget estimates are shown in Table 11A.1. The deterioration in public savings and in the overall deficit, when compared to 1975 and 1976 is striking, and even more so if one considers that the original investment target for 1977 had been set at SL 10.4 billion compared to a revised esti- mate of SL 6 billion. (In 1976, the original investment target had been SL 10 billion, whilst actuals attained a level of SL 5.2 billion.) These shortfalls should not be imputed to low absorptive capacity but rather to optimistic budgeting. This is shown by the fact that an investment level of SL 1D.4 billion would bring the ratio of investment to GDP at factor cost to 36 per- cent, with budgeted investment in agriculture rising from SL 630 million to SL 1400 million, in industry from SL 2200 million to SL 4800 million and in "oothers" from SL 700 million to SL 1900 million. Also, the financing of the overall deficit, of the order of SL 10.3 billion in the original version of the budget, only indicates an amount of SL 2.3 billion in external loans, the remainder to be covered in some way or the other. Thus, the 1977 budget, considered as a whole, reveals the need to improve budget formulation and public economic management. - 354 - Table 11A.1: CONSOLIDATED PUBLIC SECTOR FINANCE (in SL million) - Budget Est. 1975 1976 1977 Savings 1438 756 22 Central Government -2355 -3263 -3490 Revenue 2806 2766 3154 of which: Tax Revenue (2347) (2578) (3051) Non-Tax Revenue ( 459) ( 188) ( 103) Less: Expenditure 5161 6029 6644 of which: Defense (3280) (3634) (4136) Education ( 511) ( 707) ( 931) Surplus from Enterprises 3793 4019 3512 of which: Oil (2380) (2640) (2300) Investment 4502 5212 6000 /a overall Deficit 3064 4270 5978 As % of GDP at Factor Cost Savings 7.6 3.2 0.0 Investment 23.8 21.9 21.0 Overall Deficit 16.2 18.7 21.0 Defense 17.3 15.4 14.0 Government Revenue 14.8 11.6 11.0 /a Estimated actual as against an original budgeted amount of SL 10.4 billion. Source: Tables SA 5A.1 and SA 5A.4. llA.03 The real problem with 1977 prospects is that, even after allowing for a reduction of investment level to SL 6000 million--equal in real terms to that of 1975--the overall deficit would reach an all-time high of 21 per- cent of GDP, because of the expected decline in public savings. But whilst the ambitious investment targets are restrained by the country's absorptive capacity, the fall in savings reflects factors which will be difficult to reverse. The first point to be made is that the savings performance is essentially an expenditure (current) rather than a revenue problem; current expenditure (in 1977) is expected to increase by 10 percent with a GDP pro- jected 20 percent higher than in 1976, while revenue--including central gov- ernment revenue and the surplus of enterprises--are declining by 2 percent. - 355 - llA.04 The current expenditure estimates show, in terms of traditional fiscal policy, a remarkable curbing-cum-efficiency effort: defense expendi- ture is increasing by 14 percent but declining, in terms of GDP, from 15.4 percent to 14 percent: education is rising by 32 percent but only from 3 percent to 3.3 percent of GDP, a very desirable increase considering past performance; the price support allocation remains the same in nominal terms and various transfers under the Ministries of Finance and Economy are sup- posed to decrease sharply from SL 835 million to SL 495 million. It could be said, however, that the implicit reduction of current expenditure in real terms is not the result of a deliberate policy - and as such it would have been excessively contradictory - but rather the outcome of an inflationary trend which, at the time the budget estimates were put together, was not anticipated or, if anticipated, was not reflected in the estimates for lack of ability to link the budget exercise to the macrolevel scheme. Fiscal policy under inflationary conditions requires a feed-back approach without which favorable or unfavorable results are randomly distributed. 11A.05 The decline in revenue is not the result of poor performance but of expected negative windfalls with regard to the petroleum transit dues and the surplus of public enterprises: this unfortunately does not make the outcome less disastrous for the savings performance. The disappearance of petroleum dues reflects political and economic differences with Iraq, whilst the decline in the surplus of enterprises originates from a very sharp decline in foreign exchange profits by the banking system, in turn the result of the worsening of the external payments situation. Against the negative windfalls, one registers an expected 18 percent increase in tax revenue which still is below the expected increase in GDP and the reasons for this warrant an explanation. 11A.06 The single largest source of tax revenue, that is, customs duties is projected to increase only by 11 percent and this evolution is dependent on the imports expansion which clearly suffers from the present shortage of foreign exchange reserves. In addition, the curb on imports is likely to affect the higher-taxed-good thus reducing the built-in elasticity of customs revenue - other taxes and fees which represent the third largest component of revenue (about 16 percent are supposed to remain practically unchanged: here the very existence of a large number of small taxes, in addition to the stamp duties, the car fees, and the consular fees, makes it very difficult to plan a tax policy geared to the requirements of the budget. One has the feeling that such a large item is in fact evolving in a fairly random fashion with sudden increases or falls. The largest percentage increase in tax revenue is the one expected for indirect taxes on domestic production and consumption the share of which over the years has been declining continuously. The more im,portant rises concern the petroleum tax (from SL 15 million to SL 100 million) and, tobacco (from SL 66 million to SL 126 million), reflecting the need to penalize large-based and non essential consumption in a situation of inflation. THE MEDIUM-TERM PROSPECTS: ALTERNATIVE SCENARIOS AND MAIN ISSUES 1lA.07 The central question for the medium-term prospects is the following: what level of investment can be realized without disrupting the financial, and therefore structural, picture of the economy through persistently high - 356 - inflation? The investment path moves along a double rail of savings and borrowing: if the former shrinks or the latter becomes too large investment gets stuck, creating sparks and relatively little growth. Leaving metaphoric images aside, on the savings side the role of defense expenditure will be decisive in increasing central government savings, or rather by reducing the structural current deficit which will remain until defense expenditure goes down to about 10 percent of GDP (from its present 14 percent). Tax revenue will play an equally important role provided it can attain a level more in line with the potential tax effort of the country given its per capita income and degree of openness. The surplus from enterprises will evolve very much depending upon the outcome of the oil sector which accounts for two-thirds of the surplus. 11A.08 Investment, therefore, should be considered at first as the really independent variable: this however implies an evaluation of plan investment target in terms of physical absorptive capacity and contribution to the growth- cum-income distribution process. There would be little sens-e in stretching the financial envelope to its bursting point for the sake of a high investment/ GDP ratio. There is no certainty that an acceptable investment level and composition would be feasible, once the major constraints (defense expenditure and borrowing), are taken into account, and this for the main reason that having let savings reach their present trough, the process of bringing their level to at least 6 to 7 percent of GDP is likely to take a very long time. Sharp and abrupt increases in revenue are socially not feasible. As we shall see in the scenarios presented below, the investment level, at least for the intermediate years to come, may have to become the residual value in the fiscal equation; the level being dependent on the room left for non-inflationary domestic borrowing and the possibilities for external borrowing, once the maximum feasible savings effort has been independently determined. llA.09 The scenarios below will first show what is likely to happen if revenues are growing at their built-in elasticity rate--per se a significant result when compared with the past--with defense expenditure remaining unchanged in real terms at the 1977 level thus reflecting a peace-prevailing situation in the Middle East. The surplus of enterprises is projected reflecting the decline in oil revenue and therefore in the surplus of the sector. The unacceptable results of this scenario will lead to alternatives based on an increase in revenue beyond their built-in elasticity, on a more realistic forecast of defense expenditure at least up to 1985 and eventually, given the impossibility of financing the investment program at levels near or even somewhat below the present ones, explore potential reduction of invest- ment up to about 14 percent of GDP, which by definition implies a very severe scrutiny of its composition. Waste of resources is not acceptable when the overall level is declining. 1lA.10 A final consideration. These projections have been formulated both in constant 1977 prices and in current prices-assuming an inflation rate of 12 percent in 1978, 10 percent in 1979, and 8 percent in 1980 and through 1985. For simplicity purposes the inflator will be the same for all projected - 357 - magnitudes even though in fact revenue and investment, for example, will be subject to inflation in quite a different way. These differences will be indicated, whenever significant, in discussing the various scenarios. Scenario A: Accepting Plan Investment Target with Tax Revenues Increasing at Expected Built-in Elasticity llA.11 The first scenario A is based essentially on central government revenue increasing at its "natural" growth rate, that is, at the built-in elasticity of 1.3 with respect to GDP at factor cost. As to current expendi- ture, its growth reflects a policy of constraint to the lowest possible growth rate. Defense expenditure is kept constant at 1977 level which means declining in terms of GDP from 14 percent to 9 percent by 1985. Price sup- port for vital commodities is gradually declining from SL 600 million in 1977 to SL 200 million by 1985. The rest of current expenditure is supposed to increase at the same rate of GDP at factor cost, that is, 6 percent per annum. Investment remains pretty much that foreseen under the assumption that Plan investment is restricted to "ongoing" projects: it amounts to some SL 30 billion between 1976 and 1980, at a ratio of 21 percent of GDP at factor cost. The surplus of public enterprises has also been projected in a fairly opti- mistic way by having surpluses, excluding oil, increasing at 10 percent per annum, while the oil surplus is declining along the lines of the projections contained in the balance of payments forecasts. As a result, total surplus from enterprises is declining up to 1982. - 358 - Table 11A.2: SCENARIO A: TAX REVENUE INCREASING AT ITS "NATURAL" GROWTH RATE Public Sector Projections - Savings, Investment, Deficit (SL million) At current prices At 1977 prices--------- 1975 1976 1977 1978 1979 1980 1982 1985 Savings 1438 756 22 200 78 -28 -67 1100 - Central Government -2355 -3263 -3490 -3200 -2922 -2728 -2367 -1500 Revenue (2806) (2766) (3154) (3406) (3678) (3972) (4633) (5800) Expenditure (5161) (6029) (6644) (6600) (6600) (6700) (7000) (7300) - Surplus from enterprises 3793 4019 3512 (3400) (3000) 2700 2300 2600 Investment 4502 5212 6000 6000 6000 7000 7500 9000 Overall Deficit 3064 4270 5978 5800 5922 7000 7600 7900 As Percentage of GDP at Factor Cost Savings 7.6 3.2 0. 0 0.7 0.2 0.0 0.0 2.4 Investment 23.8 21.9 21.0 19.8 18.7 21.0 18.0 20.0 overall Deficit 16.2 17.9 21.0 19.1 18.6 21.0 20.0 17.0 Defense 17.3 15.4 14.0 13.2 12.5 12.0 10.0 9.0 Revenue 14.8 11.6 11.0 11.2 11.5 11.7 12.1 12.7 Source: Table SA 5A.1; and World Bank Projections. 11A.12 The outcome of this set of assumptions, which is summarized in Table llA.2, is best seen in the overall deficit which remains, up to 1982, at the extremely high level of 21 percent of GDP, clearly not acceptable from a finan- cial point of view. The high deficit is to a large extent the result of the poor prospects for savings which by 1982 are still negative. 11A.13 The main interest in this scenario is perhaps the presentation of the expected built-in elasticity of the Syrian Tax System. Any exercise of this nature should be taken with considerable caution because of a number of statistical biases arising from the need to use proxy bases for the various taxes, which are only a substitute of the real ones (for example, GDP exclud- ing agriculture for direct income and profit tax instead of individual incomes and business profits). As Table l1A.3 shows, the built-in elasticity, adjusted for improved tax administration with respect to income and profit taxes, is 1.31 which raises the tax/GDP ratio, shown in Table llA.2, very slowly from 11.0 in 1977 to almost 12 in 1980 and almost 13 percent in 1985. The lower limit (see note to Table 1lA.3) is 1.2. When compared to the need for increased public savings such built-in rise does not seem very significant. - 359. - In fact it implies quite a substantial effort if one thinks of the performance of the past showing a buoyancy below unity. By way of example, if all taxes increased by 10 percent the built-in elasticity would be 1.5, with a growth rate of 9 percent still inadequate to improve in any meaningful way the level of public savings. Table llA.3: EXPECTED GDP ELASTICITY OF THE SYRIAN TAX SYSTEM A B A X B Tax Base Contribution to 1975-77 Expected Growth Total Increase Average Rate % in Fevenue Revenue Structure Taxes on Income & Profits 24.0 GDP Excl.Agr. 11 Ia 2.64 Taxes on Property & Wealth 2.3 Construction 10 0.23 Taxes on Agriculture Production 2.7 Agr. Prod. 3 0.08 Fiscal Monopolies 6.0 Consumption 7 0.42 Excise Taxes 2.7 Consumption, 7 0.20 Import Taxes 35.0 Imports 7 2.45 Export Taxes 3.0 Exports 5 0.15 Stamp Duties 7.3 Services 8 0.58 Other Taxes 14.0 Services 8 1.14 100.0 7.89 GDP at Factor Cost Annual Growth Rate 6.00 Tax Elasticity 1.31 /b /a To the natural base growth rate of 7 percent, 2 percent was added for improved tax administration, and an elasticity factor of 1.2 was applied to reflect progressivity of business and withheld wage taxes. /b An alternative to the expected elasticity calculated in Table 1 could be based on a lower growth rate of consumption based taxes i.e., fiscal monopolies and excises; if we assume that they should grow at a. rate below that of the GDP, say 5 percent. The overall elasticity wrould be 1.28. If the reduction should be extended to "other taxes" (including taxes on motor vehicles, exit tax, and consular fees), the elasticity would decline to 1.22, i.e, with GDP increasing at 6 percent, tax revenue would increase at 7.3 percent p.a., instead of 8 percent. Source: World Bank Estimates 11A.14 The attainment of this revenue target would imply a very important fact, namely that the tax administration would function so well as to capture the whole increase in the tax base which, as far as direct taxes on income and profits and property taxes and import taxes is a challenge for tax admin- istration. - 360 - Scenario B: Plan Investment Target with Maximum - Improved Tax Effort (unfeasible) 11A.15 On the assumption that the present ratio of tax revenue to GDP is low, it seemed natural to explore a scenario based on what would be defined a maximum-improved tax effort and this to determine whether the currently programmed investment level will have a chance to be financed. The increase in revenue has been determined independently on the basis of a tax/GDP ratio increasing from 11 percent to 13 percent in 1979 and to 18 percent by 1982 (see Table 11A.4). At the same time the assumption concerning defense expendi- ture has been modified in the sense of maintaining its level at 12 percent of GDP after 1980 rather than falling to 9 percent as in the previous scenario. 1LA.16 The main features of this purely illustrative scenario are the ini- tial very sharp increase in revenue, so sharp as to be unrealistic, and the level of the overall deficit which, even if declining with respect to the 1976-77 levels, remains at 15 percent of GDP throughout the 1978-83 period (see Tables 11A.4 and 11A.5). Revenue should increase by 24 percent in real terms between 1977 and 1978 and at about the same rate in 1979 and 1980 - with GDP at factor cost growing at 6 percent and considering a built-in elasticity of 1.3, this would imply an additional increase of 15 percent to be obtained through increases in tax rates. One does not feel that such a target is attainable. But the problem becomes even more serious when considering the current price projections (see Table 11A.5) which call for a 50 percent increase in revenue in 1978, a 40 percent in 1970 and a 35 percent in 1980. The reasons for the "current" target to be more difficult to attain are the following. - 361 - Table 11A.4: SCENARIO B: MAXIMUM TAX EFFORT Public Sector Projections - Real Savings, Investment, Deficit. (SL millions) At current prices --…---At 1977 prices---------- 1975 1976 1977 1978 1979 1980 1982 1985 Savings 1438 756 22 700 1200 1800 1601) 2000 Central Government -2355 -3263 -3490 -2700 -1800 -900 -700 -600 Revenue (2806) (2766) (3154) (3900) (4800) (5800) (6900) (8200) Expenditure (5161) (6029) (6644) (6600) (6600) (6700) (7600) (8800) Surplus from enterprises 3793 -4019 3512 3430 3050 2700 2300 2600 Investment 4502 5212 6000 6000 6000 7000 7500 9000 OveraLl Deficit 3064 4456 5978 5300 4800 5200 5900 7000 As Percentage of Investment Savings 32 14 - 12 20 26 21 22 As Percentage of GDP at Factor Cost Savings 7.6 3.2 0 2.3 3.7 5.3 - 4.0 4.4 Investment 23.8 21.9 21.0 20.0 19.0 21.0 19.6 19.7 Overall Deficit 16.2 18.7 21.0 17.5 15.0 15.0 15.0 15.3 Defense 17.3 15.4 14.0 13.0 12.5 12.0 12.0 12.0 Revenue 14.8 11.6 11.0 13.0 15.0 17.0 18.0 18.0 Source: World Bank Projections. - 362 - Table llA.5: SCENARIO B: MAXIMUM TAX EFFORT Public Sector Projections - Nominal Savings, Investment, Deficit (SL millions at current prices) 1975 1976 1977 1978 1979 1980 1981&2 1985 Savings 1438 756 22 820 1610 2810 3070 5500 Central Government -2355 -3263 -3490 -3190 -2750 -1380 -1540 -1630 Revenue (2806) (2766) (3154) (4620) (6530) (9020) (13820) (22510) Expenditure (5161) (6029) (6644) (7810) (9100)(10400) (15360) (24140) Surplus from enterprises 3793 4019 3512 4010 4180 4190 4610 7130 Investment 4502 5212 6000 7100 8270 11140 15050 24640 Overall Deficit 3064 4456 5978 6280 6660 8330 11980 19140 As Percentage of Investment Savings 32 14 0 12 19 25 20 22 As Percentage of GDP at Factor Cost Savings 7.6 3.2 0 2.3 3.7 5.3 4.0 4.4 Investment 23.8 21.9 21.0 20.0 19.0 21.0 19.6 19.7 Overall Deficit 16.2 18.7 21.0 17.5 15.0 15.0 15.0 15.3 Defense 17.3 15.4 14.0 13.0 12.5 12.0 12.0 12.0 Revenue 14.8 11.6 11.0 13.0 15.0 17.0 18.0 18.0 Source: World Bank Projections. 11A.17 Profit taxes, the single largest component of direct taxes, tend to lag behind the increase in the price level because of a time lag between profit accrual and taxation: only a system of withheld profit taxes could partially eliminate the lag. Secondly, in view of increased tax evasion resulting from the normal attitude of the tax-payer to avoid showing too sharp increases in profits (which then become a bench-mark for future years' returns), which with the expectation of a slowing down in the inflation rate and therefore in the rate of increase of profits, raises the problem of convincing tax officials of this lower increase. Taxes on real property have by definition a very low elasticity under inflationary conditions since a reassessment of the values is required which is normally a time-consuming operation in any tax system and even more so in Syria where, on the whole, tax administration is at its lowest level. The yields of fiscal monopolies, especially of tobacco, can increase provided prices are increased in time; this would call for a clear picture of the prevailing inflationary trends, while here the experience is often of a 6 months lag which causes a loss of potential revenue. Customs duties are dependent on import prices and, if no changes in the rates are introduced, the - 363 - growth can be either higher or lower than the current GDP growth rate. Finally, the bulk of other taxes and fees, a significant component of the Syrian revenue system, also requires ad hoc increases in the rates or in the fees if they are to keep pace with inflation. To conclude, the chances of a 40 percent increase in tax revenue between 1977 and 1978 (and between 1978 and 1979) are very small. 11A.18 On the expenditure side, inflation has basically two effects of opposite sign: on the one hand, current expenditure usually remains within the original budget estimates (at least as far as the wage bill is concerned, unless wage increases are granted during the year, while purchases of goods and services, in nominal amounts, also are likely to remain the same because of the traditional budgetary procedure which establishes the allocations to the various ministries at the beginning of the year; what happens then is that the real content of current expenditure is cut back), but on the other hand, inflation normally hits capital expenditures harder, since construction costs tend to soar faster than others, and large cost overruns are likely to occur because: (a) the bulk of investment is realized outside the ministries (for example, in industry) and constraints to remain within the original allocations are less strict; and (b) even for investments directly controlled by the central gov- ernment it is very difficult to stop works as a result of shortage of funds: the Treasury normally intervenes with supplementary allocations. 11A.19 To conclude, the net impact of inflation on the expenditure side of the budget is in the best of circumstances to let the total amount increase in line with the expected inflation rate with a possibility of faster nominal increases due to the investment expenditure inflation being normally higher than that of GDP. These considerations provide additional reasons for con- sidering scenario B overambitious and potentially disruptive for the Syrian economy. The only solution is to reduce the investment level while projecting a more feasible improved tax effort. Scenario C is based on these premises summarized in Tables 1IA.6 and 11A.7 below. Scenario C: Reduced Investment Level with Maximum-Feasible Tax Effort 11A.20 This alternative is based on (a) an increased tax effort which should be within the reach of the Syrian government and (b) a reduced invest- ment level which would call for a very thorough scrutiny of the investment mix, especially as regards the share of agriculture and housing. Revenues have been supposed to increase more gradually than in the previous scenario C (see Table 11A.6), moving with respect to GDP from 11 percent in 1977 to 15.5 percent in 1980 and 19 percent in 1985. Investment is now down to 14 percent of GDP from the 21 percent level of 1977. If 7 percent is added for private investment we would still have for the late 70's and early 80's a respectable level of total investment. The savings performance is by definition a little worse, reaching 3.7 percent instead of 4.4 percent of GDP in 1985, but is more - 364 - reliable. The overall deficit is declining very substantially as of 1978, from 21 percent to 13 percent thus guaranteeing a reduction in inflationary pressures on the economy. Table l1A.6: SCENARIO C: MAXIMUM-FEASIBLE IMPROVED TAX EFFORT Public Sector-Projections - Real Savings, Investment, Deficit (SL millions) At current prices ---------At 1977 prices…-------- 1975 1976 1977 1978 1979 1980 1982 1985 Sayings 1438 756 22 500 800 1000 1000 o700 Central Government -2355 -3263 -3490 -2900 -2300 -1700 -1300 -900 Revenue '(2806) (2766) (3154) (3800) (4500) (5300) (6700) (8700) Expenditure (5161) (6029) (6644) (6700) (6800) (7000) (8000) (9600) Surplus from enterprises 3793 4019 3512 3400 3100 2700 2300 2600 Investment 4502 5212 6000 4500 4500 5000 5300 6500 Overall Deficit 3064 4456 5978 4000 3700 4000 4000 4800 As Peircentage of Investment Savings 32 14 0 11 17 21 18 26 As Percentage of GDP at Factor Cost Savings 7.6 3.2 0 1.7 2.5 2.9 2.5 3.7 Investment 23.8 21.9 21.0 15.0 14.5 14.0 14.0 14.0 Overall Deficit 16.2 18.7 21.0 13.0 11.5 11.7 11.0 10.5 Defense 17.3 15.4 14.0 13.0 12.5 12.0 12.0 12.0 Revenue 14.8 11.6 11.0 12.5 14.0 15.5 17.5 19.0 Source: World Bank Projections. 11A.21 Whilst the composition of the reduced investment level will be dis- cussed in detail elsewhere in the report we concentrate here on the additional revenue effort required by this alternative. Again, the current price projec- tions (Table llA.7) provide a better idea of the effort required. The overall increase to be obtained in 1978 is 36 percent, not much lower than that of the previous alternative (40 percent). But in 1979 the increase will only be 28 percent rather than 38 percent. The fact is that a larger immediate effort is required even after reducing investment in order to bring the overall deficit to a more manageable size. And it would be unrealistic to cut investment further in such a short time. - 365 - Table llA.7: SCENARIO C: MAXIMUM-FEASIBLE IMPROVED TAX EFFORT AND REDUCTION IN THE INVESTMENT LEVEL Public Sector Projections - Nominal Savings, Investment, Deficit (SL millions at current prices) 1975 1976 1977 1978 1979 1980 1982 1985 Savings 1438 756 22 600 1090 1540 1920 4630 Central Government -2355 -3263 -3490 -3410 -3090 -2650 -2690 -2500 Revenue (2806) (2766) (3154) (4440) (6100) (8220)(13440)(23770) Expenditure (5161) (6029) (6644) (7850) (9190)(10870)(16130)(.26270) Surplus from enterprises 3793 4019 3512 4010 4180 4190 4610 7130 Investment 4502 5212 6000 5320 6310 7430 10750 17510 Overall Deficit 3064 4456 5978 4720 5220 5890 8830 12880 As Percentage of Investment Savings 32 14 0 12 18 20 20 25 As Percentage of GDP at Factor Cost Savings 7.6 3.2 0 1.7 2.5 2.9 2.5 3.7 Investment 23.8 21.9 21.0 15.0 14.5 14.0 14.0 14.0 Overall Deficit 16.2 18.7 21.0 13.0 11.5 11.7 11.0 10.5 Defense 17.3 15.4 14.0 13'.0 12.5 12.0 12,0 12.0 Revenue 14.8 11.6 11.0 12.5 14.0 15.5 17.5 19.0 Source: World Bank Projections. 1lA.22 The mechanism of the built-in elasticity of the tax system (1.3) and of the inflation rate (12 percent) should generate an increase in revenue in 1978 of 21 percent thus leaving a 15 percent increase to be obtained through increases in the rates. However, the price deflator of 12 percent does not apply automatically to excise taxes, stamp duties (in part) and other taxes for which the increase is then the same as in the constant 1977 price projec- tions. These taxes cover about 37 percent of total revenue and therefore the need to increase the rates (or the prices of certain products) in order to reach the overall increase is pro tanto magnified. Stamp duties represent a special case since 70 percent of the proceeds of the tax comes from stamp duties or contracts (8 per SL 1000) it is fair to assume that inflation will affect the value of contracts. By the same token, import duties are also regulated by their own price deflator which for 1978 can be fixed at around 10 percent. - 366 - 11A.23 We show in Table 11A.9 how the revenue increase can be attained using the 1978 over 1977 change as an example of possible fiscal strategy based on the existing tax-structure. We leave the considerations on how the tax structure could be modified to the section on policy recommendations (in Chapter 11). As to the years after 1978 the revenue projections are those presented in Table 1IA.7: since the increases after 1978 are, as noted above, much less sharp, the solution proposed for 1978 should be more easily applic- able in the following years. Estimates of Tax Elasticity under Inflation 11A.24 The problem of inflation with respect to the built-in elasticity of the tax system is illustrated in a general way in Table llA.8. The Table shows what the elasticity becomes under various inflation rates as a result of the behavior of revenue components which do not increase automatically with inflation. The differences with respect to the elasticity of 1.3 under stable prices are quite large: those responsible for the preparation of the budget should be more aware of this factor. The solution to this problem, discussed under policy recommendations in Chapter 11, is to substitute the various excise taxes with a general sales tax which would capture automatically any increase in the nominal GDP. The other conclusion from this feature of the Syrian tax system is that when the target is to increase revenue beyond the growth rate of GDP, or rather beyond their built-in elasticity, the task for the government becomes extremely difficult since it requires a very large increase in tax rates. By way of example, in 1978, in order to achieve the desirable growth rate in revenue of 36 percent the portion of the increase which would derive automatically from the elasticity would be only 16 percent thus leaving a 21 percent increase to be obtained by ad-hoc rate changes. In Table I1A.9 a possible tax policy solution is indicated and again the type of tax-rate adjustments, rather than the precise figures should be considered as really relevant. - 367 - Table 11A.8: CDP TAX ELASTICITY OF THE SYRIAN TAX SYSTEM UNDER INFILTION /a (SL millions at current prices) Est. Budget Inflation Rateas 1976 1977 12% 20% 15% 8% Tax Elasticity 0.85 0.70 0.77 0.97 Tax Revenues 2766 3154 3652 3750 3684 3600 Taxes on Income & Profits 651. 730 907 970 931 875 of which profit tax (502) (510) Taxes on Property & Wealth 56 67 83 89 85 80 Taxes on Agric. Production 67 100 116 124 118 111 Profits from Fiscal Monopolies 118 224 240 240 240 240 Excise Taxes 35 126 135 135 135 135 Import Duties 993 1100 1290 1290 12590 1290 Export Taxes 65 100 111 116 11.2 109 Stamp Duties 172 187 220 232 222 208 Other Taxes 422 417 450 450 450 450 Non-Tax Revenue 188 82 100 106 1t1 95 /a The elasticity of the tax system is based on the elasticity of the various taxes in the absence of inflation indicated in Table llA.3 above. The elasticity of each tax, resulting from the growth rate of its appropriate tax basis, has been subsequently multiplied by t'ae rate of domestic inflation in all cases in which the taxes applied to the current value of the tax basis (e.g. income and profit taxes, stamp duties on the value of contracts, on agricultural production). In all other cases (excise taxes-, tobacco monopolies, etc., the yield of the tax remains unaffected by the inflation rate. Source: Table SA 5A.3 and World Bank Estimates. IIA.25 Table 11A.9 shows the additional increases in tax rates or sur- charges which would be required to attain the revenue target of SL 4.4 billion in 1978. By definition the surcharges are highest for those revenues which do not increase automatically with inflation. The question is whether tax policy should follow closely the directions suggested by the table or rather make some significant internal adjustments. It is likely that considerations of efficiency in tax collection and of equity might come into the picture in a conflicting way. Furthermore there is a remark to be made as far as customs duties are concerned: the additional 16 percent in revenue would be obtained either by increasing the rates or currently tax paying items--with emphasis on higher consumption goods--or by eliminating a part of the total exemptions now prevailing. Since most of these items are purchased by public enterprises with administered prices these additional costs could be absorbed by the enterprises without generating further inflationary pressures. One 4should also keep in mind that in a situation of declining inflationary rates, most of the measures for 1978 could mean, once and for all, the possibility of their elimination or at least reduction in following years. - 368 - Table 11A.9: CENTRAL GOVERNMENT REVENUE EFFORT FOR 1978 (SL millions at current prices) 1978 Based on Built-in 1978 Elasticity Sur- with 17.1% 1978 charges 1976 1977 inflation Target % Taxes on Income & Profits 651 730 950 1045 10.0 of which profit tax (502) (510) Taxes on Property & Wealth 56 67 86 95 10.0 of which property transfer tax (31) (30) Taxes on Agric. Production 67 100 120 144 20.2 Profits from Fiscal Monopolies 118 224 240 312 30.0 of which tobacco (66) (140) Excise Taxes 35 126 135 175 30.0 Import Duties 992 1100 1290 1510 16.0 Export Taxes 65 100 111 138 25.0 Stamp Duties 172 187 231 277 20.0 of which duties on contracts (120) (131) Other Taxes 422 417 450 585 30.0 - Car fees 97 120 - Consular fees 124 130 - Exit fees 110 120 Non-Tax Revenue 188 82 100 120 20.0 Total Revenues 2766 3154 3713 4400 19.0 Source: World Bank Estimates. 11A.26 The high surcharges on a numler of fiscal monopoly products and excises make good sense since their relative price is going to decline with inflation: tobacco, gasoline for private cars and alcoholic beverages should bear the brunt of the increase. Stamp duties on contracts could also be increased by 50 percent (from SL 8 to SL 12 per SL 1,000) and the same is true for car-fees. Finally, property transfer taxes and rental income taxes could probably be raised beyond the 10 percent indicated in the table while keeping the rates on wages and salaries unchanged. The whole area of land and buildings speculation has to be reviewed closely, as pointed out in the recommendations--given the very large profits which are currently being realized in Syria in this sector. 11A.27 One last consideration: the Syrian tax system, because of the poor built-in elasticity of excise and fiscal monopolies in periods of inflation, tends to grow more progressive with direct taxes on income and profits in- creasing their role: for example, in 1977 these taxes account for 24 percent - 369 - of tax revenue; in 1978, with a 17 percent inflation their share would increase to 25.6 percent. With inflation at 20 percent they would rise to 26.6 percent. In general terms, the lack of elasticity with respect to GDP is accompanied by an increase in progressivity of the tax system. The trade-off between effi- ciency and equity is evident. But this is not the end, for in fact there are some indirect taxes which, by losing ground to GDP and to direct taxes, increase the regressiveness of the tax system while causing a shortfall in revenue: there are, for example, car fees, taxes on alcoholic beverages, gasoline taxes (for private-use cars) and tobacco monopolies for higher quality tobacco since all these goods are shared by the middle and especially higher income groups. That is why, through ad hoc and timely changes in the rates or prices of such commodities, the government can utilize required resources for development and at the same time improve the income distribution picture. 370 - CHAPTER 11 APPENDIX llB THE RELATIONSHIP BETWEEN GOVERNMENT INVESTMENT PROGRAMS AND INFLATION: A MACROECONOMETRIC MODEL 11B.01 The important role of money supply in the inflationary process is a familiar proposition in economic theory. Money supply exerts its influence on prices through its impact on the community's aggregate expenditure on goods and services. When aggregate spending exceeds the sum of domestic and im- ported supplies of goods and services, upward pressure on prices ensues. Prices expectations play a role in the money supply-inflation nexus. Sub- stantial increases in the money supply fed by domestic investment and credit operations lead to higher rates of inflation. If the community revises upward its expectations of future inflation rates, it reduces its demand for real money balances; the situation of excess supply of money is exacerbated and this leads to further increases in aggregate expenditure, and hence prices. 11B.02 The Syrian experience has generally conformed to this pattern. In addition, some other factors such as the openness of the economy and the system of administered prices have accentuated the inflationary situation. As Table 11B.1 shows, for the last three years Syria has been experiencing double-digit inflation, as measured by improvements in all three indices: the GDP deflator and the wholesale and retail price indices. The information in Table 11B.1 suggests that domestic credit operations are potent devices that have set in motion changes in the money supply, and through the latter's powerful impact on aggregate expenditure, changes in prices as well. The linkages of credit operations to changes in the money supply, aggregate demand, and rate of inflation also suggest the potential use of such opera- tions as discretionary demand management tools in inflation control. The purpose of this appendix is to explain the mechanics of inflation in Syria in terms of the monetary factors, and to forecast inflationary consequences of alternative investment programs. This appendix draws upon the work of Mr. Dan P. Villanueva, IMF (Consultant); this work also appeared as an unpublished staff study of the International Monetary Fund: DM/77/103, "The Relationship Between Government Investment Programs and Inflation: The Syrian Experience". - 371 - Table 11B.1: INFLATION, MONEY AND BANK CREDIT, 1971-1976 (In percent) 1971 1972 1973 1974 197'S 1976 GDP deflator 10.39 9.02 7.62 46.66 19.14 17.75 Wholesale prices 10.57 -5.15 32.56 14.04 7.1B 12.44 Retail prices 4.24 3.15 19.88 16.40 11.21 13.96 Money plus quasi-money 8 26 20 46 21 24 Net foreign assets -52 15 851 57 18 -99 Net claims on government 17 22 -28 33 -18 127 Claims on public sector 11 32 28 68 52 44 Sources: Central Bureau of Statistics, Central Bank of Syria, and World Bank estimates (see Tables SA 2B.6, SA 6.2 and SA 6.9). A Macroeconomic Framework for the Syrian Economy 1lB.03 For the purposes of this appendix the Syrian economy is structured along the following lines. On the sources side aggregate domestic supply consists of domestic output plus imports less exports, and on the utilization side aggregate demand is broken down into private consumption, government consumption and aggregate investment (public and private). As a first approxi- mation, domestic output, both for home use and for export, is specif:Led as determined outside the model, growing at a predetermined exponential rate over time. Of course, such a growth rate varies according to the size of the investment program undertaken by the government and private sectors. Real private consumption is assumed to depend first on real disposable income net of tax payments and subsidies, and second on the excess supply of real money balances, the latter being defined broadly to include savings and time depo- sits. As disposable income and/or excess supply of money balances rise so does consumption. 11B.04 Real government consumption and aggregate real investment are assumed to be determined exogenously. In particular, aggregate investment and domestic credit operations are determined by the authorities and are. taken as stabilization devices. The behavior of real imports is explained by movements in total real expenditure and in the ratio of import prices to domestic prices. As total expenditure rises, real imports are expected to increase pari passu. However, an increase in import prices should lead to a slowdown of imports. Since government imports are included in aggregate imports, net foreign transfers to, and borrowing by, the Government also explain the behavior of imports. Foreign loans and net transfers received by the private sector serve as explanatory variables for private sector imports. 1lB.05 Sources of government revenue such as taxes, nontax receipts, loans and transfers from public sector enterprises, and foreign loans are assumed to be known and, therefore, not explained by the model. Any excess government expenditure on consumer and investment goods above the combined receipts from taxation and the other aforementioned revenue sources is covered by borrowing from the monetary system. - 372 - 11B.06 The supply of money is generated by the overall fiscal deficit, borrowing by the public sector enterprises, and the balance of payments. The latter indicates changes in net international reserves which are equal to net factor income from abroad, plus exports less import payments, plus net trans- fers to and foreign borrowing by both government and private sectors, plus allocations of SDRs. 1lB.07 Finally, the key relationship in the macroeconomic system is the rate of inflation. Stabilization of prices is a major objective of government policies. In the Syrian context, the inflation relationship is specified to be not only empirically meaningful but also institutionally plausible, taking account of prevailing price rigidities, price expectations, excess demand, and imported inflation. Accordingly, the rate of change in the general level of prices is assumed to depend on the excess of aggregate demand over aggregate supply, expected rate of change in prices, rate of change in import prices, and government pricing policies. The expected rate of inflation is assumed to be generated by current and past observed rates of inflation. 1IB.08 The macroeconomic framework just described can be visualized with the aid of the accompanying flow chart which shows the basic relationships among the major macroeconomic variables and their interaction with the control instruments. The main target variables are the rate of inflation (INFL) and real GDP (GDP); the control instruments are government investment (IG) and domestic credit operations (NOA). Assume an unspecified increase in the monetary system's credit to public sector enterprises (NOA) that is induced by higher levels of government investment (IG). The domestic compo- nent of the money supply (MONB) immediately rises-, raising real private consumption (CP) and total expenditure (TOTALE). Real imports (M) go up, reducing net foreign reserves (NFA). As real aggregate demand (TOTALE) goes up, prices (INFL) rise with three simultaneous effects: first, the expected rate of inflation (PIE) rises which increases further both aggregate expendi- ture and prices; second, real income goes up; and third, real imports increase. The balance of payment deteriorates further reducing the net foreign component of the money supply. Therefore, a once-and-for-all increase in the monetary system's credit to public sector enterprises raises the rate of inflation and real income, but due to the feedback effect on the money supply through the balance of payments, the process is soon observed. 373 - FIGURE IB.1 A Monetary Model of the Syrian Economy (Arrows Indicate Main Influence; Signs Indicate Director of Causation) NOA ~~~~~~~~~~~+ + ~ +. PIEg . I +~~~~~~~~ r ~~~~NGA l + ~ _ Meanings of Symbols Contained in Flow Chart NOA: Monetary system's net domestic assets exluding net claims M: Real imports. on government but including claims on public sector enterprises. NFA: Net foreign assets of the monetary system. IG: Real government investment. GDP: Real gross domestic product. MONB.: Money supply, broadly defined to include savings and time deposits. INFL: Rate of change in the general level of prices. CP: Real private consumption. PIE: Expected rate of change in the general level of prices. TOTALE Real total expenditures. NGA: Monetary system's net claims ons government. World Bank - 18684 A Monetary Model of Inflation 11B.09 This section presents and estimates a simple monetary model of the Syrian economy. The specification of tehe model follows the general features of the monetary approach to the balance of payments, as applied to a. number of developing countries by Aghevli and Khan. 1/ However simple and aggregated 1/ B. Aghevli and M. Khan, "Credit Policy and the Balance of Payments in Developing Countries", International Monetary Fund, unpublished, 1976. The developing countries studied are Argentina, Brazil, Colombia, Ecuador, Mexico, India, Korea, and the Philippines. For a thorough exposition of the monetary approach to the balance of payments and its historical development, see-M. Mussa, "Tariffs and the Balance of Payments: A Monetary Approach", in J. Frenkel and H. Johnson (eds.), The Monetary Approach to the Balance of Payments (Allen and Unwin, London, 1976) and J. Frenkel, "Adjustment Mechanisms and the Monetary Approach to the Balance of Payments: A Doctrinal Perspective", a paper presented at the Third Paris-Dauphine Conference on Money and -Inter- national Problems, Paris, March 28-30, 1974. 374 it may be, a monetary model can be useLul in describing the behavior of key macroeconomic variables of the Syrian economy in response to changes in eco- nomic policies, such as government investment programs, and other exogenous disturbances, such as foreign aid. 11B.10 The Syrian model consists of 12 equations, 3 of which are behavioral relationships explaining real private consumption, real imports, and inflation. The model is completed by definitions and identities determining real expendi- ture, real income, price levels, net foreign reserves of the monetary system, net government borrowing from the monetary system, and money supply (broadly defined to include savings and time deposits). All behavioral equations are estimated by ordinary least squares 1/ using annual observations from 1966 through 1976 as revised by the World Bank (Tables SA 2B.6, SA 6.2 and SA 6.9). A complete set of data is given at the end of this Appendix. 1. Real Private Consumption 1IB.11 The behavioral relationship explaining private consumption plays a key role in the monetary approach to the balance of payments. Real private consumption is assumed to be a positive function of real disposal income (net of real tax payments and receipts of subsidies) and excess supply of real money balances. CP = a0 + a1/[GDP - TAX + SUBSIDIES] + a2/[MONB/PGDP - (MONB/PGDP) ] where CP is real private consumption, GDP is real income, TAX is real tax revenue of the Government, SUBSIDIES is real subsidy payments by the Govern- Government, MONB is the supply of broad money, (MONB/PGDP) is the real demand for broad money, and PGDP is the general price level. The demand for real money balances is assumed to be a positive function of real disposable income and a negative function of the expected rate of inflation, (MONB/PGDP) = bb[GDP - TAX + SUBSIDIES] - b2PIE where PIE, the expected rate of inflation is approximated by a weighted average of present and past rates of inflation. Substituting the above demand-for-money function into the private consumption relation results in the following estimable equation for CP, CP = (a - a2b0 ) + (a - a2b1)[GDP - TAX + SUBSIDIES] + a 2MONB/PGDP + aIb 2PIE 1 2 1/ There are 23 exogenous variables and only 11 observations. The two- stage least squares estimating technique breaks down in this case. - 375 - The estimates of the above equation are given below (t-statistics are in parentheses): (1) CP 939.00 + 0.2825 (GDP - TAX + SUBSIDIES) (4.71) (2.69) + 0.7042 MONB/PGDP + 55.6014 PIE (3.95) (2.91) + 539.016 DUMCP (7.33) R = 0.991697 ; SEE = 86.871549 ; DW = 1.71348 There was a sudden drop in real private consumption in 1972 and a dummy vari- able (DUMCP) with a value of -1 for that year and zero otherwise is included in equation (1). Note that equation (1) assumes that the adjustment of actual composition to its desired level is completed within one year. This a priori restriction is consistent with the one-year mean time lag in the adjustment of real expenditures reported by Aghevli and Khan 1/ for each of the eight developing countries. 2. Real Imports 11B.12 Real imports (M) are a positive function of real total expenditures (TOTALE) and a negative function of the import price to domestic price ratio (PM/PGDP). Since government imports are included in (M), net real borrowing (KG) by and real transfers (NTRANSG) to the Government from abroad are also included as separate explanatory variables. Foreign loans (KP) and transfers (NTRANSP) to the private sector (in real terms) also serve as explanatory variables for private sector imports. Import prices (PM) are used to express foreign loans and transfers in real terms. (2) M = -289.465 + 0.4072 TOTALE - 665.05 PM/PGDP (0.24) (6.23) (0.52) + 0.1168 (NTRANSG + NTRANSP) + 0.5996 (KP + KG) (0.65) (0.97) R = 0.97329 ; SEE = 145.32009 ; DW = 1.59538 3. Inflation 11B.13 The rate of inflation is specified in such a way as to take into account prevailing price rigidities in the Syrian economy, the role of price expectations, supply/demand imbalances, and Syria's openness (imported infla- tion). Accordingly, the following inflation relationship is run: 1/ Aghevli and Khan, op.cit. - 376 - (3) INFL = 0.2151 + 18.4645[TOTALE/GDPC) - 1] (0.21) (2.41) + 44.7481[PM/PM_1) 1] + 1.0 PIE (8-89) + 7.5440 DUMINFL (5.52) R = 0.953993 ; SEE = 2.42449 ; DW = 1.73084 where GDPC is capacity real output. The coefficient of the expected rate of inflation is restricted to be equal to unity, consistent with both theoretical expectation and empirical validity. 1/ Since the overall price level is an average of controlled and uncontrolled prices, a dummy variable (DUMINFL) is included in equation (3) to capture movements in administered prices, espe- cially those under direct central control. 4. The Complete Model 11B.14 The complete model for simulation purposes consists of the above three behavioral equations plus identities and definitions as shown in Table 11B.2. Equation (4) defines the current level of prices as its previous level multiplied by its rate of change. Equation (5) defines aggregate real expendi- tures as the sum of total government consumption, real private consumption and real total investments (government and private). In Equation (6) real gross domestic product is aggregate real expenditure plus real exports minus real imports. Equation (7) determines the net foreign reserves of the monetary system, while Equation (8) solves for net government borrowing from the monetary system after total expenditure, tax revenue and receipts from other sources are known. Equation (9) determines the money supply as the monetary system's net foreign assets plus net claims on the Government plus net other domestic assets. Equations (10) and (11) are statistical constructs linking the price deflators for government consumption and investment to the overall price deflator, the parameters being derived from regression analysis. Finally, Equation (12) approximates the current expected rate of inflation to be the weighted average of current observed inflation and the previous expected rate. 5. Simulation Results llB.15 In order to test the goodness-of-fit of the entire model, a dynamic simulation of all endogenous variables was performed. A dynamic simulation is one in which the values of the lagged endogenous variables are themselves generated by the simulation process. The goodness-of-fit statistics presented in the previous section apply only to individual equations. When actual and 1/ A unitary coefficient has been estimated by Aghevli and Khan, op.cit., for each of the eight developing countries in their study. - 377 - simulated values of all endogenous variables are compared, a judgment may be made on the goodness-of-fit of the complete model. A dynamic simulation also permits a test of the stability of the model. llB.16 There are in all 12 endogenous variables simulated by the entire model. Among these, three are of major interest, viz., inflation, real GDP, and net international reserves. The simulated and the actual values of each of these variables are plotted in Figures llB.2, llB.3 and llB.4. The simu- lated path of inflation appears to track fairly well the observed record of inflation. The root mean squared error (RMSE) of the simulated values is about 17 percent of the average actual rate of inflation. The model predicts inflation remarkably well during the double-digit inflationary period, 1974-76. Within-sample simulations of the behavior of real GDP show a very good fit with RMSE equal to only 2 percent of the actual average real GDP. Large errors occur in the prediction of the stock of net international reserves, especially during 1969-72. However, the model tracks the turning points-- negative net reserves in 1970-72 and positive net reserves from 1973 onward. The RMSEs of all 12 endogenous variables are reported in Table 1lB.3. FIGURE 1 1B.2 Syria Rate of Inflation (Percent) so 40- 30 - 20 - Actual 10 Simulated 0 -10 I 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 World Bank - 18749 378 - FIGURE 11B.3 Syria Real Gross Domestic Product (Millions of Syrian Pounds) 9000 8000 7000 - Actual -/ 6000 - _ _ C~ ~ ~~~~ Simulated 5000 _ 4000 - 3000 1 l l 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 World Bank - 18750 FIGURL I .B.4 Syria Net International Reserves (Millions of Syrian Pounds) 2000-- _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 15(0 I o An_II 511',) ' S//' \ 0 -) ___ _-N---Ll Program Rate Ratio A SL 30 b 12.0% 2.4 17.0 B SL 25 b 10.0% 2.6 ~_ **,, ~_ ' C SL 25 b 10.5% 2.4 N * -1s D SL 25 b 11.0% 2.3 16.5 - E SL 25 b 115% 2.1 16.0 - --A 15.(5 - c 15.0- D-a. 14.0 E 14.0 1978 1979 1980 World Bank- 18752 Conclusion 11B.24 This paper has analyzed the relationship between government Lnvest- ment programs and inflation in a developing economy with particular-reference to Syria. A simple monetary model of the Syrian economy was constructed and estimated then used to forecast the inflationary impact of alternative public investment programs under the Five-Year' Plan covering the period 1976-1980. Since investment has a dual effect on output demand and supply, a sensitivity analysis was undertaken to simulate the paths of inflation corresponding to different average values of the capital-output ratio. 11B.25 Two experiments were conducted. The first assumed an aggregate SL 30 billion investment program between 1976 and 1980. The second assumed a reduced public investment program amounting to SL 25 billion. In both experiments the public sector firms were assumed to increase their borrowing from the monetary system through 1980. Under the SL 25 billion investment program, inflation was projected to decline to a rate below 15 percent by 1980 (starting from an actual rate of 18 percent in 1976). In order to achieve a hypothetical 10 per- cent inflation rate by 1980, without regard for other economic variabLes, the government investment program needs to be scaled down to just over SL 21 bil- lion between 1976 and 1980. Such a reduction in investment would imply, for example, declines of 5 percent and 7 percent, respectively, in the aggregate flows of real GDP and real imports over the five-year plaaning period. - 386 - CHAPTER 12 FOREIGN TRADE AND THE BALANCE OF PAYMENTS 12.01 Syria's institutional structure has undergone a number of changes in the last two decades. Prior to 1958 the country's institutions were suited primarily for a laissez faire development strategy. This was interrupted in the period 1958-61 following the Union with Egypt (UAR) and an initial wave of nationalizations. After separating from the UAR in 1961 there was an attempt to return to the earlier institutional structure. However, with the accession to power of the Ba'athists in 1963 the dominant role of the state sector in the economy was permanently established with a second wave of nationalizations. It was during this period 1963-70 (primarily 1966-70) that foreign trade was brought under the guidance of the state as a state monopoly. Only after 1970 was there an attempt to gradually liberalize development and trade strategy by giving the private sector a significant complementary role to. the state sector accompanied by new policies and legislation. 11 12.02 Throughout this period, despite substantial modifications in the institutional structure, the basic development strategy remained intact. Its aim was to industrialize Syria as rapidly as possible by taking advantage of the relatively abundant physical resources base in agriculture and mining. A major objective of the Government's investment strategy during this period was to reduce Syria's dependence on imports in phases (i.e. to pursue an import-substitution development strategy). 2/ Initially the imports of con- sumer goods were to be reduced followed by intermediate goods and finally capital goods to the extent feasible and possible given the structure of locally available factors of production and resources. However, as in other countries, this phased import-substitution strategy has not resulted in a reduction of the overall import level as the ambitious investment programs needed for the industrialization strategy to succeed the generated need for higher levels of imports of capital goods and intermediate goods. 12.03 A corollary objective of the investment strategy was, in addition to satisfying the domestic market in final consumer goods (thereby reducing the need for imports),, to develop the capacity of the industries to a level where economies of scale and the overall output levels would make possible 1/ See Volume 3, Annex 1 on International Trade and Finance for additional details. 21 The only modification in the strategy was in the period 1966 and 1970, wnen the Government made an attempt at autarchic development, despite Syria's historical specialization in commercial activity. However, given the relatively small overall size of the economy and the ambitious investment program set forth for the country, it was not possible to reduce Syria's dependence on external trade, particularly imports. - 387 - expanded exports. This would in turn allow Syria to gradually shift the composition of her exports away from raw materials to semi-processed and finally to processed goods (for both consumption and investment), and to simultaneously increase the value added content of the processed products. 1/ 12.04 To date Syria's system for controlling the trade deficit has been directed at limiting the level and structuring the pattern of imports, rather than promoting the level and diversification of exports. In addition, the level and composition of imports were controlled more through direct administrative measures such as prohibitions and quotas than through indirect economic (price mechanism) measures such as tariffs and exchange rates. Despite these administrative measures the brief period of high rates of economic growth between 1973 and 1976, (9.5 percent a year on average, in contrast to 4.9 percent a year between 1970 and 1973, and 6.9 percent; a year between 1966 and 1970),2/ was accompanied by a growing resource gap (Table 12.1) implying an increasing import elasticity with respect to GDP.31 1/ For example, for the Fourth Five-Year Plan this objective is to be accomplished by a long-term shift from the export of raw cotton to the export of yarn and textiles, from the export of crude petroleum to the export of refined petroleum and petroleum products, from the export of phosphate rock to the export of trisuperphosphate fertilizers, and from the export of other raw materials, such as hides, to the export of their manufactured counterparts, such as finished leather goods. 2/ GDP at factor cost has been used to eliminate the dampening effect of subsidies, which are substantial: Growth Rates (% p.a.) GDPmp GDPfc 1966-70 6.6 6.9 1970-73 5.6 4.9 1973-76 7.3 9.5 3/ Import elasticities with respect to GDP (that is when GDP increased by 1, the import in question increased by the multiple of 1 shown). Import of goods and non-factor services Import of goods only (Based on the constant (Based on SITC quantity series data of the Bank indices) adjusted national accounts) 1966-70 0.53 1.25 1970-73 1.30 1.24 1973-75 5.72 3.59 - 388 - 12.05 This expansion in imports followed the 1973 increase in the price (and volume) of Syrian petroleum exports, which significantly boosted Syria's own export earnings, and the sharp rise in Arab grants after the October 1974 Rabat agreement which augmented financial resource availability in the short run. This increase in liquidity led to sharp increases in aggregate demand, particularly after public investments were increased following a revision of the Third Five Year Plan (1971-75). Table 12.1: RATIOS OF MERCHANDISE TRADE DEFICIT AND RESOURCE BALANCE TO AGGREGATE DEMAND (Percent of Aggregate Demand) Trade Deficit Resource Balance Goods and Year Goods Goods and Services Non-Factor Services 1963 4.4 0.7 1966 9.0 4.2 - 1969 9.5 3.5 4.9 1970 9.5 3.6 5.4 1971 11.4 4.2 5.6 1972 9.3 3.5 4.8 1973 9.8 2.3 3.3 1974 8.2 7.1 8.4 1975 10.3 10.4 10.8 1976 15.8 16.2 16.2 Sources: Tables SA 3A.1, SA 3B.1, and SA 2B.4. 12.06 The quadrupling of imports in current prices, primarily due to increased public (and private) investments between 1973 and 1976, caused commodity export earnings to decline as a share of commodity import payments from 80.3 percent in 1963 to 56.8 percent in 1970 and 46.9 percent in 1976 (Table SA 3C.1). The continuation of this declining trend, or even a con- tinuation of the 1976 resource gap of 16.2 percent of aggregate demand, with the low current gross domestic savings rate it implies, is not sustainable, especially as net reserves in 1976 were close to zero. A balance of payments constraint on Syria's future rates of growth is emerging as a consequence of Syria's recent trade and borrowing performance, and her potential future trade prospects and borrowing requirements over the next decade. The past performance and future prospects are discussed below separately. The emerging balance of payments constraint points to the need for active intervention by the government in trade policy (to reduce the country's trade deficit), particularly in a manner which is less dependent on slow-to-respond adminis- trative measures only. - 389 - DEVELOPMENTS DURING THE THIRD FIVE-YEAR PLAN (1971-75) 12.07 Syria's balance of payments was in surplus throughout most of the Five-Year Plan period as a result primarily of transfer induced surpluses on the current account balance. The sudden deterioration in Syria's external payments position which occurred in 1976, however, was already in the making as the trade gap continued to widen with the growth rate of exports lagging in relation to the growth rate of imports (despite the 18-fold increase in earnings from petroleum exports). 12.08 Commodity Exports. During the sixties Syrian exports were primarily from the agricultural sector. However, as agricultural production was weather- dependent and hence very volatile, 1/ the overall level of Syrian exports fluctuated as the share of agricultural exports varied with the fluctuating domestic output and the continuously increasing domestic demand (Table 12.2). In the 1970s, agricultural exports other than cotton, such as cereals, vegetables, fruits and livestock, declined steadily in importance. This trend was particularly marked in 1973-75 as Syrian domestic demand for these food- stuffs increased more rapidly than production. 2/ Table 12.2: VALUE-ADDED IN AGRICULTURE, MINING, AND MANUFACTURING Shares Value-Added Real Growth (% of GDP at current (SL m. at 1963 prices) (% per year in 1963 prices) prices) Manu- Manu- Manu- Agri- fac- Agri- fac- Agri- fac- Year culture Mining turing culture Mining turning culture Mining turing 1968 1,056 33 688 - - - 26.5 0.3 16.8 1969 1,367 70 768 29.5 112.1 11.6 29.3 0.8 16.6 1970 1,117 124 791 -18.3 77.1 3.0 22.7 2.2 15.4 1971 1,147 176 846 2.7 41.9 7.0 22.8 3.7 14.6 1972 1,470 250 902 28.2 42.1 6.6 27.9 4.2 14.3 1973 1,045 252 949 -28.9 0.8 5.2 18.7 5.6 16.6 1974 1,448 306 1,044 38.5 21.4 10.4 21.3 16.5 13.3 1975 1,550 445 1,131 7.0 45.4 8.3 18.5 17.1 13.0 Source: Tables SA 2B.1 and SA 2B.2. 1/ Agricultural output continues to be very weather-dependent, as irrigated acreage is still a relatively small fraction (10 to 15 percent) of total cultivated area. 2/ It should be noted that the declining importance of agricultural exports also reflects the increased significance of petroleum as an export commodity. - 390 - 12.09 The principal commodity produced by the agricultural sector for export purposes during this period was ginned raw cotton, the production of which remained relatively constant over the ten years 1962-75 (Table SA 7.7). The volume of cotton exported actually decreased slightly as more and more of the cotton was used in domestic production of yarn and fabrics (Table SA 3D.2). In the long run, unless agricultural output is stabilized on a sustained growth path, it is unlikely that agriculture can regain its importance as a major export producing sector. 12.10 By far and away the most significant developments for Syrian exports since 1970 have come from the exploitation of her mining resources, primarily from an expansion of petroleum production (and to a much lesser extent from increased phosphate production). The expansion of petroleum as an export commodity started in 1968 after commercial exploitation of petroleum began. Until the completion of the Homs refinery all of Syrian crude production was exported. After the Homs refinery came onstream in 1971 a portion of the Syrian crude was diverted for internal processing and refining, leading to a decline in the share exported (Table 12.3). 1/ Nonetheless, by 1975 petroleum exports accounted for 70 percent of total Syrian commodity exports (Table SA 3D.2). Its share of total exports, however, is unlikely to increase any further in the future (see para 12.43). Table 12.3: SHARE OF OUTPUT EXPORTED Agriculture Mining Manufacturing 1968 41.2 136.1 /a 12.9 1969 36.4 170.6 /b 9.8 1970 40.7 99.8 10.8 1971 29.9 69.6 9.0 1972 32.6 58.3 12.5 1973 50.6 59.4 14.8 1974 36.2 70.2 12.7 1975 21.6 75.1 11.0 /a Reflects the statistical discrepancy between reporting sources on output and exports. Source: Tables SA 2B.2 and SA 3D.3. 12.11 Despite the export policy objective of increasing the share of manu- factured goods in total exports, the contribution of manufactured exports to the growth of the country's total export earnings has hitherto been modest (Table 12.4), particularly since Syria's actual investments in manufacturing 1/ The share of crude exported increased when the Homs refinery was damaged during the 1973 war. - 391 were directed more toward import substitution industries, than towards export oriented industries. Nonetheless, the export of manufactured goods grew from SL 102 million in 1970 to SL 350 million in 1975 in current prices (Table 12.5) representing an average annual growth of about 28 percent. Table 12.4: SECTORAL ORIGIN OF EXPORTS AND IMPORTS, 1968-75 (Percentages of Total) Exports Imports Agriculture Agriculture (SITC 0,2 Mining Manufacturing (SITC 0,1 Mining Manufacturing Year and 4) (SITC 3) (SITC 1,5-9) and 2) (SITC 3) (SITC 1,5-9) 1968 79.5 4.7 15.8 26.0 11.4 62.6 1969 77.5 10.6 11.9 20.8 10.4 77.8 1970 70.1 16.7 13.2 32.2 7.9 59.9 1971 62.3 24.0 13.7 39.4 6.1 54.5 1972 66.5 18.3 15.2 28.2 4.5 67.3 1973 58.8 21.7 19.5 31.0 4.6 64.4 1974 34.1 55.2 10.7 33.5 3.7 62.8 1975 19.5 70.3 10.2 22.3 6.5 71.2 Source: Exports: Table SA 3D.3; Imports: Table SA 3D.7. 12.12 Based on a composite of unit values of main manufactured exports, the estimated real growth of the sector's exports was about 5-6 percent per annum in the 1970-75 period 1/, slightly below the real growth rate of manu- facturing output, but above that of agricultural output and exports. As a result, the share of manufactured goods in total exports, excluding petroleum, rose from 16 percent in 1970 to 34 percent in 1975, even though the share of exports of manufactured goods in total exports, including petroleum, declined from 13.2 percent in 1970 to 10.2 percent in 1975 (see Table 12.5). 12.13 Textile products (in order of importance yarn, fabrics and clothing) continue to dominate the exports of the manufacturing sector, although their relative share in the sector's exports declined from about 75 percent: in 1971 to 61 percent in 1975--reflecting a modest diversification of the structure of manufactured exports away from the traditional textiles and processed foods to include new export items such as cigarettes, metal products, and even some machinery and equipment. 1/ The bulk of Syria's exports of manufactured goods are to Arab countries and to Socialist countries. The latter are the main markets for Syria's exports of textile fabrics and ginned raw cotton, Syria's principal exports after petroleum. - 392 - Table 12.5: CCMMODITY COMPOSITION OF SYRIAN EXPORTS, 1970-75 Commodity 1970 1971 1972 1973 1974 1975 Value of Exports: (millions of Syrian pounds at current prices) Manufactured Goods /a 102.2 191.5 166.2 261.8 311.5 350.6 Crude Petroleum 128.8 176.0 200.2 291.2 1,607.5 2,419.2 /b Phosphate Rock 0.0 0.0 2.5 10.7 81.9 56.0 Cotton 303.8 313.9 373.1 448.3 715.0 439.4 Other 240.5 151.9 355.6 329.3 198.1 173.5 TOTAL 775.3 743.3 1,097.6 1,341.3 2,914.0 3,438.7 Percentage Share Manufactured Goods /a 13.2 13.7 15.2 19.5 10.7 10.2 Crude Petroleum 16.6 23.7 18.2 21.7 55.2 70.3 Phosphate Rock 0.0 0.0 0.2 0.8 2.8 1.6 Cotton 39.2 42.2 34.0 33.4 24.5 12.8 Other 31.0 20.4 32.4 24.6 6.8 5.1 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 /a SITC Sections 1 and 5 through 8. /b Include SL 42.6 million refined products, mostly residual fuels. Exports of refined petroleum products prior to 1975 were essentially nil. Source: Bulletin of Central Bank of Syria, 1975, and Statistics of Foreign Trade of Syria, (1970-75). 12.14 In the public manufacturing sector there have been persistent and often large shortfalls in achieving export targets, despite the fact that often annual targets were revised downward in view of the previous year's performance. The General Organizations (GOs) for sugar and for cement do not yet export any products and the export performance of the GOs for chemicals and for engineering products (metal products, machinery and equipment), which are nominally oriented toward import substitution has deteriorated, despite the existence of underutilized capacity and the accumulation of inventories in some product lines. 1/ As a result a large proportion (some 61 percent) of 1/ A case in point is television sets, whose production was about 39,000 units in 1975 of which 29,000 units were sold locally and the balance accumulated in inventories. - 393 - Syria's manufactured exports in 1975 was in fact produced in the private sector, 1/ even though most of it was exported through public trading compa- nies. 12.15 One important reason for the shortfalls in the public sector may be the absence of an incentive system which would reward the General Orgarliza- tions for attaining or exceeding their targets and would penalize them for shortfalls. Syria's present export incentive system is limited to a subsidy on exports of cotton yarn and fabrics. The subsidy ranges from 6 to 1.2 per- cent of selling price depending on the degree of processing. Provided by the Export Promotion Fund of the Ministry of Industry, the subsidy is financed from the proceeds of a levy of SL 0.20 per kilogram on yarn production. 2/ Both public-and private firms may avail themselves of the subsidy. In addi- tion to the explicit subsidy on textile exports, these exports are also implicitly subsidized, as the price paid for cotton to farmers is only about half the world price. The need for the textile export subsidy should be reassessed, 3/ even though a comprehensive export incentive system may have to be established to stimulate exports, particularly by public manufacturing enterprises whose performance in this respect has not yet proved to be very encouraging. 12.16 Commodity Imports. The import of consumer goods other than vital foodstuffs (and of luxury items in particular) was discouraged in the 1960's through an elaborate administrative system of controls. 4/ Despite this administrative control system, and partially as a result of the liberalization of certain import items during the 1970's, the volume of imports required for development grew much more rapidly than domestic output so that the share of imports increased from 27 percent of GDP in 1970 to 40 percent of GDP in 1976. 12.17. Food is becoming a significant item in Syria's imports. The import of cereals such as wheat 5/ and flour (commodities which are also produced domestically), accounted for 2.4 percent of total merchandise imports in 1976. Together with the import of foods not produced domestically, such as rice, sugar and a number of manufactured food products, the share of total food 1/ 1975 is the only year for which a breakdown of manufactured exports by private or public sector origin has been reported. Central bureau of Statistics, Statistics of Foreign Trade of Syria 1975 (Damascus, 1975), Table 17. 2/ One kilogram equals 2.2046 pounds. 3/ See Chapter 9. 4/ For details see Volume 3, Annex 1 (International Trade and Finance). 5/ In the early sixties surplus wheat was imported from the U.S. under Public Law 480 (Food for Peace). - 394 - imports reached 10-15 percent of total commodity imports in 1976 and shows no sign of declining, as domestic consumption requirements appear to be growing more rapidly and steadily than domestic production (see Chapter 8). 12.18 Syria also imports a significant volume of consumer goods. For example, Syria has continuously been a net importer of textiles, despite the presence of a textile industry in Syria. Also, following the qualified liberalization of certain private imports in 1975, 1/ Syria began importing large quantities of consumer durables. In particular, in 1976 Syria imported automobiles to a value of approximately SL 700 million ($180 million). 12.19 However, despite the importance of imports of food and consumer goods mentioned above (particularly in 1976, coincident with the presence of a large number of Lebanese refugees), Syrian imports have historically con- sisted primarily of intermediate and capital goods (Table SA 3D.5). The share of intermediate goods and of capital goods in total imports increased from 75.8 percent in 1970 to 82.6 percent in 1975, as a consequence of the ambitious investment program and development strategy adopted during the third five-year plan. The import of capital goods increased more rapidly than the import of any other component of total imports (Table SA 3D.5) as virtually all of Syrian capital good requirements are imported (Table SA 3D.17), primarily from Western Europe and to a lesser extent from Eastern Europe and the Soviet Union (Table SA 3D.18). 12.20 The largest category of imports to Syria, however, are intermediate goods. Until the Homs refinery was constructed all of Syria's petroleum needs were imported in the form of refined products. Subsequently, Syria has imported petroleum both in the form of crude, 2/ and of refined products. Other intermediate goods imported included cement and construction materials for defense and construction purposes, fertilizers 3/ for agriculture and other semi-processed goods, primarily components for Syria's growing assembly industry. 12.21 Syria's electrical, chemical and mechanical industries have not yet been developed to the point where they can supply from locally available resources, many of the component parts necessary for other industries. As a 1/ As noted in Volume 3, Annex 1 (International Trade and Finance), private sector imports were facilitated by the creation of an "extraordinary permit system" in 1971 (extended by Law Number 267 of April 7, 1975) allowing the import of certain items previously restricted to the public sector. In 1976, private sector imports accounted for 25 percent of total imports excluding the special item recorded (in 1976 only) as "gold imports" (40 percent of the total including "gold"). 2/ Syrian crude has a high sulphur content which necessitates blending with imported Libyan or Iraqi light crude. 3/ It should be noted that current investments in fertilizer and cement plants, as well as a tractor assembly plant, are a result directly or indirectly, of the integrated development program for the Euphrates Valley. - 3 9 _ - consequence, intermediate inputs that are domestically produced for Syria's assembly industry account for only between 2 to 10 percent of total inter- mediate input requirements. The low proportion of intermediate inputs pro- vided by domestic industry suggests that the new assembly industry has not yet contributed to increasing the input/output linkages in the domestic economy 1/. Thus, even though the assembly industry has ne-sssitated an increase in the magnitude of intermediate goods imports and their share in total imports, it has not provided an offsetting improvement in export capa- bility. As a result, unlike some of the new industries coming onstream, such as cement and fertilizer plants, and petroleum refineries, which are based on domestic resources, many of the assembly industries producing tractors, refrigerators, television sets and other consumer durables 2/ have generated a net foreign exchange drain on the economy. This drain might be an acceptable cost of diversifying the industrial structure only if the cost is temporary. 12.22 Non-factor Services. Until 1975 the services balance of the goods and services account was continuously in surplus, primarily as a result of royalties and transit dues from the TAP and IPC petroleum pipelines. Despite the surge in overland shipment from Europe to the major oil producing countries of the Middle East since 1974, freight transit dues have not yet become a significant item in the non-factor services account. Similarly tourism, which has traditionally been an important industry in the Middle-East, is n.lot yet a very significant element in Syria's balance of payments, even though it accounts for one third of earnings from non-factor services and one half of payments for non-factor services. In 1975, for the first time, the non- factor services account went into deficit following a very rapid increase in "tourism" 3/, "government", and "other" expenditures abroad concurrent with the intervention in Lebanon (1975-76). I/ As pointed out in a Syrian Planning Institute Thesis by Mahmoocl Qabaqibi, "The Economics of Selected Industries in the Syrian Arab Repub].ic," Damascus (1973), few of the prerequisites for establishing an assembly industry can be found in Syria: (1) availability of locally produced parts, (2) availability of expertise and skill labor locally, (3) steady reduction of import content in value added, (4) conservation of foreign exchange expenditures, (5) increasing competitiveness of the cost of production per unit internationally to be exportable and not require subsidies or protective tariffs, (6) increasing forward and backward linkages to integrate and balance the input and output structure of domestic manufacturing. 2/ In addition to tractors, televisions and refrigerators, Syria assembles washing machines, radio apparatus, telephones, batteries, (wat:er, elec- tricity and gas) meters, stoves, pressure cookers, and miscellaneous consumer appliances. 3/ Between 1972 and 1975, the number of Syrian civilians going abroad more than doubled from 110,000 to 250,000, whereas the number of foreigners visiting Syria increased by only one percent, from 990,000 to 1,000,000. - 396 - 12.23 Factor Income. It is conjectured that 200,000 to 300,000 Syrian con- struction workers and seasonal agricultural laborers were working in Lebanon, and 80,000-100,000 in the Gulf area in 1976. Estimated remittances 1/ from these workers abroad recorded in the World Bank adjusted balance of payments increased at the rate of approximately 13.3 percent a year between 1969 and 1974 (Table SA 3B.1). The absolute level of remittances declined in 1975 and 1976 as a result of the displacement of Syrian workers in Lebanon during the Lebanese civil war despite a presumed increase in the number of Syrian laborers in the Gulf area. 12.24 Syria has no explicit policy to encourage the migration of labor and to mobilize the remittances of migrants abroad for investment purposes (as a means of financing the foreign exchange needs of the country). 2/ As a conse- quence there is no comprehensive method of recording the flow of migrants in gross or net terms, in or out of Syria, nor of estimating the large portion of remittances not remitted through the official banking system. This is a policy area deserving attention, as the impact of labor migration on the country's development potential is likely to be significant, especially as it appears that Syria is currently losing skilled laborers and professionals to members of OAPEC. 3/ Unrequited Transfers 12.25 As can be noted from Table SA 3A.1, Syria's overall balance of pay- ments position has been very sensitive to external pressures resulting from conflicts in the region and from her relatively weak export base. Until 1967, the balance on current account fluctuated annually between surplus and defi- cit as the persistent deficit on goods and services was occasionally offset by modest net transfer receipts. The reconstruction effort after the 1967 war, brought a deficit on current account for four years in succession. In point of fact a significant surplus was not attained until after the 1973 war, when very substantial transfers from OAPEC members (as a result of the Khartoum and Rabat agreements) offset the rapidly deteriorating balance on goods and services account, thereby contributing to the buildup of reserves. Thus, non-factor services until 1973, and transfers since 1973 were very significant in reducing the impact of the merchandise trade deficit on the balance on current account. 1/ These estimates are preliminary. See Volume 3, Annex 1 (International Trade and Finance). 2/ Interest payments as an element of the factor income accounts have in- creased steadily and rapidly each year during the Third Five-Year Plan period from SL 37 million in 1970 to SL 225 million in 1976 reflecting the increasing size of the country's external debt. 3/ Organization of Arab Petroleum Exporting Countries. - 397 - 12.26 Private Capital Flows. Private capital inflows into Syria were almost discontinued between 1963 and 1970. A substantial amount of domestic capital was also presumed to have been diverted out of the country, primarily to Lebanon, during that period. However, since 1971 with the liberalization of private imports (paid for out of foreign exchange holdings abroad), a small but sustained return flow has been recorded in the official balance of payments data. 12.27 Syria's policy on direct private foreign investment is still being formulated. There is some apprehension that control over domestic production activity will be lost to foreigners through large scale foreign investment; this apprehension has been reflected in reluctance to grant foreign f.irms the right to remit profits without limit, or to give them a controlling share in investments of a joint venture type. Nonetheless, in recent years Syria has been moving towards liberalizing her foreign investment code and investing in the establishment of Free Trade Zones. The objectives are to attract foreign investment to facilitate the development of export-oriented industries and to stimulate economic growth by introducing new technology, marketing and research knowhow. 1/ 12.28 External Public Borrowing. Receipts of foreign exchange from goods and non-factor services plus factor income from abroad have been declining steadily from approximately 75 percent of total foreign exchange requirements in 1970 to 60 percent in 1975 and 51 percent in 1976 (Table SA 3C.1). The remainder has had to be provided by gross borrowing and by unrequited trans- fers (12 to 15 percent). The magnitude of transfers appears to have been exclusively responsible for the build-up of reserves between 1972 anLd 1975.2/ 12.29 Concurrently with the increase in transfers after 1973, Syjria embarked on a relatively unconstrained borrowing period as a consequence of the greater liquidity, and outside interest, in the region. This led to a very rapid increase in the magnitudes of commitments and disbursements of capital funds (Table SA 4.4). This was a sharp reversal of Syria's previous policies (until 1973) on external debt and borrowing, which had been very conservative. 12.30 Commitments in the four year period 1973 through 1976 were nine times as large as in the previous four year period 1969 through 1972. Dis- bursements, of course, did not increase as rapidly as commitments due to the delay in processing projects and the constraints on the economy's ability to absorb the funds immediately. Nevertheless, disbursements were four times as large in the period 1973-76 as they were in the period 1969-72, which indi- cates a remarkable ability to absorb sudden increases in available funds, even though this absorption was partially reflected in an increased capital-output ratio and an increased rate of inflation. 1/ For details see Volume 3, Annex 1 (International Trade and Finiance). 2/ Similarly, reserves would probably not have declined as substantially in 1976 as they did, had the share of foreign exchange supplied by transfers continued at the 1975 level instead of declining by a third. - 398 - 12.31 The change in the structure of capital flows is a reflection of changed political circumstances and a concurrent change in the pattern of trade. Syria now exports and imports more from the OECD countries, 1/ partic- ularly the European Economic Community, than she does from the Communist coun- tries who used to be her primary trading partners during the late sixties. 2/ OAPEC countries are important in Syria's merchandise trade only to the extent that Syria imports petroleum from them. They are, however, a very important source of indirect financing for Syria's trade with other nations. 12.32 By December 31, 1976, outstanding foreign debt stood at $966 million disbursed (triple the 1973 level) 3/, and $2,543 million disbursed and undis- bursed (five times the 1973 level)--see Table SA 4.1. Service payments on this rapidly accumulating debt has more than doubled between 1973 and 1975, exceeding $100 million per year since 1975 4/ and projected to peak on the basis of existing debt alone at $289 million in 1981. DEVELOPMENTS IN THE BALANCE OF PAYMENTS IN 1976 12.33 In 1976 there was a sharp deterioration in the current account bal- ance from a surplus of SL 350 million in 1975 to a deficit of SL 3.0 billion (Table SA 3A.1). This deterioration reflected an increase in the merchandise trade deficit from SL 2.3 billion in 1975 to SL 4.8 billion in 1976 and a decline in formerly offsetting net receipts from services and unrequited trans- fers. The trade deficit increased as the presence of an estimated 500,000 Lebanese in Syria increased the demand for consumer goods, while increased public and private investments (particularly in construction) increased the demand for intermediate and capital goods. In addition, Syria was belatedly 1/ The Organization for Economic Cooperation and Development (OECD) consists of the Western industrialized countries and includes the United States, Canada, Germany, Japan, etc. 2/ For details see Volume 3, Annex 1 (International Trade and Finance). 3/ Of this outstanding and disbursed debt over 21 percent was held by the Soviet Union, 19 percent by Saudi Arabia, 10.6 percent by Romania, 4.5 percent by multilateral organizations (primarily the World Bank and IDA). In addition, 12 percent was held in the form of suppliers' credit (50 percent of which was held by France). Of the undisbursed but committed portion of the debt slightly over 16 percent each was held by Saudi Arabia, Romania and the World Bank Group, 8 percent by the Democratic Republic of Germany, 6 percent by the U.S, and only 5 percent by the Soviet Union (Table SA 4.2). 4/ The debt service ratio in 1976 was 9.5 percent of the export of goods and non-factor services. It should be noted, however, that military debt and transactions are not included in this analysis. -399-- affected by the increase in the price of petroleum imports as a result of the termination of a three year agreement with Iraq in 1976 which had been con- cluded before the increase in petroleum prices in 1973. 12.34 The loss of oil royalties and transit dues from the old IPC pipeline, after the collapse of negotiations on new rates, and the indirect costs of the intervention in Lebanon 1/ contributed to a deficit on the non-factor services account. In addition, transfer payments dropped by a third (from SL 2.4 bil- lion in 1975 to SL 1.6 billion in 1976) due to an apparent discontinuation of Rabat payments. Hence despite a 40 percent increase in net public capital inflows, reserves had to be drawn down by SL 1.9 billion to finance the deficit. At the end of 1976 net reserves were negative even though gross reserves were still equivalent to two and half months' imports (Table SA 3E.1). 12.35 To cope with the deteriorating balance of payments position in 1977 a number of decrees and laws were issued which: (a) temporarily suspended the import of a few items such as passenger automobiles and nonessential consumer goods from the list of importable items; (b) required closer monitoring of import licenses and foreign exchange clearances given to merchants with foreign exchange abroad, who had registered through the Chamber of Commerce (up from 500 in 1972 to 5000 in 1976); 2/ (c) required the collection of deposits on documentary credits opened at the request of the public sector: a 15 percent 1/ In the last quarter of 1976, SL 1.5 billion of "gold' was officially recorded as imported by the private sector (primarily Lebanon) from Switzerland. This unlicensed but legal import was described as a diver- sion of gold normally imported into Beirut for illegal and unrecorded reexport to Turkey and other countries of the Middle East. The gold was imported against Lebanese accounts abroad and did not affect Syria's official foreign exchange reserves. However, it appears to have offset commodity payments for loans from the Soviet Union and Eastern Europe, reflected in the drawdown of reserves, even though no foreign exchange earnings were recorded by the Directorate of Customs. The gold import should be classified as a transfer item, or as an offsetting iltem in the non-factor services category. However, in accordance with the official balance of payments classification it has been treated as a proxy for commodity imports financed by unrecorded remittances or private capital flows. 2/ See footnote 1, para. 12.18. - 400 - deposit for the import of raw materials or intermediate goods, and a 100 percent deposit for the import of technical assistance and expenses incurred by experts; 1/ and (d) delayed the opening of letters of credit and the postponing of payments for certain public enterprise imports (partic- ularly if there was evidence of overstocking or that the import was of nonessential items). INTERNATIONAL TRADE AND PAYMENTS OBJECTIVES OF THE FOURTH FIVE-YEAR PLAN 1976-1980 12.36 The plan consists basically of a very generalized list of objectives and a more detailed list of projects divided into those that were ongoing and those that were new projects in 1976. 2/ The foreign exchange component of each project over the plan period and by year is not provided (in many cases none exist even as estimates). Neither the import requirements of the invest- ment program, nor the anticipated export contributions of the program are provided in any form: gross, by sector, by project, by year, ... The only references to foreign trade are: (a) a list of intentions for the promotion of exports, Arab trade cooperation and the encouragement of Foreign Trade General Organizations (Plan, p. 287), and (b) a targeted export growth rate of 10 percent per annum and an import growth rate of 7 percent per annum. 12.37 In terms of current prices the export target is probably feasible but the import target grossly underestimated whereas, in terms of constant prices the import target is feasible only with a reduced GDP growth rate of 4 to 6 percent a year (one third to one half the plan target GDP growth rate of 12 percent) and an import elasticity of 1.0 to 1.8, while the export target is unattainable even with a heroic export drive. An assessment of more likely trade and payments prospects is presented next. GENERAL ASSESSMENT OF MEDIUM-TERM TRADE AND PAYMENTS PROSPECTS 12.38 During 1976, Gross Domestic Investment was estimated to be as high as 30 percent of GDP in current prices. Although the Government has decided 1/ Announcement number (29/30) of October 1976 superseded paragraph A of the announcement number (182/30) of November 15, 1971 exempting the public sector from payment of deposits, and all of announcement number 20/30 of July 26, 1976 granting a similar exemption on credits opened from the public sector and guaranteed by the public debt fund. 2/ For details see Chapters 9 and 13,) the list was curtailed in early 1977 to ongoing projects alone. - 401 - to shelve the Fourth Five-Year Plan as originally conceived, pending economic justification of all the projects included in the Plan, it has resolved to continue implementing at least all on-going projects. As a result, public investments for 1976-80 are assumed to be restricted to SL 35 billion at 1975 prices, of which on-going projects would be SL 27 million. It is also assumed that the implementation rate for public investments will be 7-0 percent, and that the private sector will invest an additional SL 8 billion in 1975 prices (i.e. 29 percent of total investments). Therefore overall fixed capital formation during the Fourth Plan period (1976-80) should not exceed SL 35 billion in 1975 prices (or SL 37 billion in 1976 prices). 12.39 Given an ICOR of about 4.5, to reflect investments in longer gestation proj ects, this level of investment should translate into an average GE?P growth rate of slightly over 6 percent p.a. between 1976 and 1980. This would imply that the Government is locked into a high average investment level in current prices of 29 percent of GDP, slightly below the 26 percent average recorded during the Third Plan period. For the period 1980-85 it is assumed that ICORs would improve to 4.0 as the long-gestating projects come on-stream. AIs a result, a six percent per annum average GDP growth rate could be sustained with the average level of investments dropping to 24 percent of GDP (Lmplying a low two percent per annum real growth rate for investments). 1/ 1/ The overall GDP growth rates between 1976 and 1985 above are consistent with the following sectoral growth rate assumptions. - During the Third Five-Year Plan (1971-1975) period agriculture grew by 7 percent per annum. However, this performance was primarily a statistical reflection of a very poor harvest in 1970 and a good harvest in 1975. Real growth between peaks of agricultural output (1969-75) was only 2 percent a year. As a result of the 1973 drought and October 1973 war, agricultural output gained its 1969-72 level only in 1974, and most of the real growth in output occurred only in 1975. With the expansion of irrigation and the use of improved agricultural technology it is possible that agricultural output can grow on average around 3 percent per annum between 1977 and 1985. - Even though prospects for growth in mining are at present not very bright, a 10 percent per annum growth rate in overall industrial output (mining, manufacturing, and construction) between 1977-80 and 9 percent therea ter is possible. This growth would come primarily from increases in construction activity and manufacturing output resulting from the anticipated 2.5 times increase in textile spinning capacity, a quadrupling of cement ouput and the addition of 2 to 3 fertilizer plants by 1980, as well as the increasingly liberal business climate for small and medium scale manufacturing. - The real growth rate of services is likely to decelerate from its high levels during the Third Plan period to 3.5 to 4.0 per- cent per year on average until 1985 resulting in a diminuation of the currently very large share of services in GDP. - 402 - 12.40 Commodity Exports. In 1976 exports of crude petroleum and phosphates accounted for over 70 percent of commodity export earnings. Despite a thirty- year reserve at current levels of production, domestic production of petroleum from existing wells appears to have peaked and production from new wells is apparently insufficient to offset the loss from old wells. Undoubtedly, if the current technical limitations to increasing production are overcome, 1/ or if large new deposits are discovered and brought into production before 1980, the outlook for petroleum exports would be considerably more optimistic than suggested by the petroleum production projections in Table SA 8A.12. 2/ How- ever, unless the new petroleum deposits are found and exploited, or the inter- national price of phosphate rocks improves substantially, 3/ mining which was the major source of export growth in the Third Plan period will not contribute at all to overall export growth in the future. To counteract the decline of the principal current sources of foreign exchange earnings (petroleum and raw cotton) and to retain the existing volume of exports in constant prices, the 1/ The decline in petroleum production from known exploitable reserves is a result of technical limitations (increasing water content) rather than the implementation of a conservation policy. 2/ The volume of exports of petroleum in particular is projected to decline to approximately 70 percent of its 1976 level by 1980, assuming that both the Homs and Banias refineries are operating at 85 percent of capacity. Note that domestic consumption of petroleum in 1976 was 4 million tons, up from 2.1 million in 1970 and 1.5 million in 1966 (Table SA 8A.5). This is equivalent to a growth rate of 12 percent per annum between 1966- 76. If the growth of domestic consumption continued at this rate, it would exceed domestic production capabilities by 1981-83 and Syria would iose its status as a net petroleum exporter. It is possible that in the mid-1980's approximately 1.4 billion m3 of gas could be made available as feedstock for chemical plants (see report of the French consulting firm, SOFRELEC "General Studies for the Development of Electric Power and Interconnection with Neighboring Countries", November 1977). This would amount to supplying approximately 1.3 million tons of refined products which would decrease the net deficit in refined petroleum products accordingly. However, this project will only become operative in 1985 at the end of the period under discussion. 3/ Despite the increase in the primarily export-oriented production capacity of phosphate rock to 1.5 million tons per annum in 1976, the export of phosphate rock declined from 850,000 tons in 1975 to 500,000 tons in 1976, with export earnings declining from SL 90 million in 1974 to SL 56 million in 1975 to SL 43 million in 1976 due to the unfavorable international prices for phosphate rock. - 403 - export of agricultural and manufactured products would have to grow at approximately 15 to 20 percent per year (and more if there is to be a rapid net increase in exports in the future). 1/ 12.41 During the Fourth Plan period agricultural exports are likely to grow steadily in perishable products, such as fruits and vegetables, and per- haps also in poultry products, as a result of the favorable conditions for domestic production and the existence of effective demand in neighboring countries and the Gulf area. However, the export of the principal export earning commodity in agriculture, that is raw cotton, is expected to clecline substantially by 1980 to reflect the increased domestic utilization oi- the commodity in the production of textiles. It is presumed that in the maedium- term the volume of cotton production will increase only marginally. The prospects for steady growth in other agricultural exports such as cereaals and livestock products during the plan period or over the next decade also do not seem bright unless substantial adjustments can be made in the organization and efficiency of the agricultural sector. It is possible that in years with good weather domestic production would exceed domestic consumption requirements leaving a surplus for exports. However, it is unlikely that any significant portion of the production of these subsectors would become "export-oriented". 12.42 Thus the pressure for leading export growth in merchandise trade during the next decade will be on the manufacturing sector. The export prospects for this sector during the Fourth and part of the Fifth Plan period are discussed in detail in Chapter 10. As noted there, one of the primary objectives of the Fourth Plan investment program for the manufacturing sector is to increase the exports of manufactures, which have hitherto contributed relatively little to the country's export earnings (Table 12.4). This objec- tive is likely to be realized, even if not as rapidly as projected by the government. Manufactured exports could grow substantially over the next few years as a result of the anticipated surplus production of textile products (mostly cotton yarn), in which Syria has a comparative advantage, and of cement and fertilizer. 2/ This does presume, however, that markets for Syria's excess production of the latter can be found. 12.43 Another potentially promising, but modest, area for increasing manu- factured exports is in food processing. Exports of vegetable oil, processed vegetables (such as tomatoes) and canned fruits could be increased. 2/ However, since expansion of exports in these product lines requires an uninterrupted 1/ In this context, it may be essential to create and use new production capacity in excess of domestic needs in textiles, cement, and trisuper- phosphate fertilizers. The completion of the new projects slated for these industries in the Fourth Five Year Plan (1976-80) might have to be combined with an aggressive export promotion program for exports to grow at all; and this assumes that the contribution to foreign exchange earnings of these new projects would be greater than their demands on foreign exchange and that their export earnings would materialize very soon, within the next two to three years to avoid a foreign exchange bottleneck in the early 1980's. 2/ The prospects for export growth envisaged here may have to be revised downwards as regards cement and processed foodstuffs. In 1977-79 internal demand for these items has risen much faster than anticipated, reducing exportable surplus. - 404 - increase in the supply of domestic raw materials, it will be necessary for a successful increase in processed food exports to establish close coordination in planning with the agricultural sector. 12.44 On the other hand, Syria has so far had little success in exporting assembled engineering goods (such as television sets and refrigerators). Since the product lines of Syria's engineering industry have counterparts in neighboring countries and the products have a relatively small domestic value-added content, the potential for these industries to contribute to the expansion of exports in the near future seems weak. 12.45 As a result of the foregoing assessment of export prospects by sector it should be clear that at best the small growth in agricultural exports and the potentially substantial growth in manufacturing exports will be barely sufficient to offset the expected decline in the volume of Syria's principal current export earners, petroleum and raw cotton. At best a 2 percent per annum real growth in exports can be expected. Any attempt at a more rapid growth of exports will probably have to come from a stabilization of the volume of Syria's current primary export earners at their present level. 12.46 Commodity Imports. In view of the structural peculiarities of the Syrian economy, the empirical relationship between changes in imports and changes in GDP is neither stable nor entirely meaningful; aggregate demand has recently been determined much more by the size of transfer receipts and workers' remittances than by the growth of GDP, which has been affected by weather conditions and military operations. Hence it is appropriate to assume that the level of aggregate demand was essentially determined exogenously, making past and future comparisons of import elasticities of GDP problematic. 12.47 Nonetheless, in the absence of better alternate indicators, an analysis of import prospects based on highly tentative estimates of import elasticities is provided in the following paragraphs 1/. The 1970-75 import elasticity of food with respect to total consumption was slightly negative reflecting both the higher import requirements in the 1970 drought year and the lower import requirements in the good harvest year of 1975, as well as the shift in cropping composition away from cash crops (reflected in the decline of the area devoted to the production of cotton, see Table SA 7.7) towards food crops (reflected in the increasing area devoted to cereal production, see Table SA 7.5). Even between the two recent record harvests of 1972 and 1975 the import elasticity of food with respect to consumption was negative. Never- theless, assuming a higher growth rate in domestic consumption requirements relative to domestic production capabilities (see Chapter 8), the growth rates in the volume of food imports can be expected to be positive but less than the growth rate of GDP (i.e. an import elasticity of less than 1.0). The import elasticity of "other consumption goods" with respect to consumption during 1/ Import elasticity with respect to GDP (or its component) is defined as the percentage change in import as a ratio of the percentage change in GDP (or its component), during a given period. - 405 - 1970-75 was more than 1.5. This elasticity can be expected to drop tci 1.0 or lower, to reflect the import substitution strategy for consumer goods adopted by the Government. 12.48 The greater than one import elasticity of petroleum with respect to GDP for 1970-75 can be assumed to continue through 1985 (despite the increased utilization of domestic crude) to reflect the continued need to import non- Syrian light crude to blend with heavy Syrian crude. 1/ The 1.2 import elasticity of "other intermediate goods" with respect to industrial output during 1970-75 can be assumed to increase gradually, to reflect the expected growth in output of import substituting assembly industries, even though much of Syria's export-oriented industrialization in the next few years will come from domestic resource-based industries such as textiles (cotton), fertilizers (phosphate), and cement. 12.49 The import elasticity of capital goods with respect to gross fixed capital formation of 1.0 during 1970-75 will probably continue in 1985, despite the large base of capital goods imports in the period 1975-76. This assumption may be on the low side and not fully reflect Syria's total dependence on the importation of capital goods to implement her long-term industrialization strategy. 12.50 As a result of the above assumptions, the high overall import elasticity with respect to GDP in 1970-75 of approximately 2.3, which reflected the effect on the economy of the 1970 and 1973 droughts, the October war and the operation in Lebanon, can be assumed to decline, but remain within the 1.2 to 1.5 range, that is imports can be expected to continue growing as rapidly as, or more rapidly than, GDP into the early 1980s. It should be noted that for analyzing the balance of payments implications of the! level of imports the overall import elasticity is more significant than that of the various components. 12.51 Other Balance of Payments Components. Before we can proceed to generating illustrative external public borrowing requirements it will be necessary to make a very brief assessment of the likely prospects for the other components that enter the current account balance. 12.52 Although receipts from the exports of non-factor services (largely pipeline dues and royalty payments) hitherto offset payments for imports of non-factor services, it can be assumed, at least for the Fourth Five-Year Plan period, that the net non-factor services balance will deteriorate over 1/ This need could diminish if recent discoveries in Northeast Syria prove to contain commercially exploitable reserves of light crude within Syria. - 406 - time, consequent upon the loss of pipeline dues and royalty payments. 1/ In the case of net factor income it can be assumed that one part of it, consisting of workers remittances and net interest on private capital, will increase at a rate sufficient to offset the deterioration of the balance on the non-factor services account. The second part, consisting of the net position on interest on public capital, can be generated through the operation of a simplified debt model, in which the level of gross reserves is held as a reasonable fraction of annual imports (say 2 1/2 months) by assumption. 12.53 Total unrequited transfers can be assumed to increase only slightly, or more likely to stabilize at the 1976 level in constant prices (which was about 1/3 lower than the 1975 level of transfers). 2/ That is, the nominal increases in transfers would be equivalent to the increase in the international price index. In principle, these assumptions (and procedures) are tantamount to allowing the merchandise trade deficit (only partially offset by transfers) to determine the bulk of the capital requirements of the economy. 12.54 Illustrative Public Borrowing Requirements. With real growth in exports of less than 2 percent p.a. and an import elasticity of 1.2-1.5 with respect to GDP as suggested in paragraphs 12.45 and 12.50 respectively, the resource gap, for an economy growing at an average six percent per annum, would increase to 18 percent of GDP for the periods 1976-80 and 1981-85. This is substantially higher than the average resource gap of 8 percent of GDP during the Third Five-Year Plan period (1971-75). Since the prospects are that the other components entering the current account balance will not offset 1/ Receipts from the export of non-factor services (tourism, trade, etc.) are not likely to grow substantially in real terms, even though expendi- tures on the input of non-factor services are likely to continue growing more rapidly than GDP, perhaps with an elasticity of 1.3 with respect to GDP (that is an 8 percent per annum). The prospects with regard to the non-factor service balance could be brighter than assumed above if "peace" should be restored in Lebanon. This would allow the bulk of expenditures on non-factor service imports to grow more slowly than in the recent past, and perhaps even decline relative to their 1976 levels, as 80 percent of the four and a half fold increase between 1973-75 in non-factor service imports is presumed to have resulted from military related Government expenditures. It would also allow the receipts from the export of non-factor services, particularly tourism and freight transit dues to increase more rapidly as Syria's investments to attract tourists and facilitate regional transit, in view of her central location, are more fully utilized. It could also lead to a resumption of the TAP and IPC pipeline royalties and transit dues. 2/ It should be noted in this context that official transfers may even decline in real terms (unless tensions in the region increase if the Palestinian issue remains unsettled) as most OAPEC donors, the primary source of official transfers, are apparently interested in shifting gradually from grants to interest-free or low interest loans for projects with feasibility studies. - 407 - most of the deficit in the goods and non-factor services account, this suggests that the country's gross disbursement requirements 1/ over the period 1976-85 will be on the order of SL 110 billion (or $28 billion at the 1976 exchange rate of SL 3.9 to the dollar). The unlikelihood that the country could borrow such vast amounts becomes apparent when it is contrasted with the SL 2.4 bil- lion gross disbursements during the Third Plan period which was already an unsually good performance. There is little need to emphasize the debt: ser- vicing problems that would emerge consequent upon borrowing on this scale. 12.55 It will therefore be necessary to project alternative scenarios to illustrate the external public borrowing requirements consequent upon various ways of reducing the resource gap. It should be borne in mind in this context that for a given rate of GDP growth and a given level of investment, the resource gap is very sensitive, by definition, to variations in the gross domestic savings performance. During the Third Plan period GDS averaged 16 percent of GDP in current prices, however, the increase (in absolute value) that did take place, for example, in tax revenue during the period derived not from an increase in the tax base (taxable capacity) due to past development policies and investments, but from less lasting causes. A large In 1975 Prices Scenario I Scenario II 1976-80 1981-85 1976-80 1981-85 Average Gross Domestic Savings Rate as a Share of GDP 10% 9% 14% 15% Total Gross Domestic Investment (SL billions) 35 41 35 41 Average Compound Growth Rate of Gross Domestic Product 6% 6% 6% 6% Growth Rate of Merchandise Exports 4.2% /a 7.7% 3.5% /a 6.7% Growth Rate of Goods Plus Non-factor Service Exports /b 3.2% /a 6.3% 3.4% /a 6.6% Growth Rate of Merchandise Imports 4.1% 7a 6.0% 2.3% 7a 4.0% Growth Rate of Goods Plus Non-factor Service Imports 3.7% /a 5.5% 1.7% /a 4.0% /a Using 1976 actuals as a base. 7¶ Non-factor services assumed not to grow in real terms in scenario I as a consequence of the loss of petroleum pipeline dues/royalties and the stagnation of tourism, and to grow in real terms at the same rate as merchandise exports in scenario II to reflect a possible resumption of petroleum pipeline dues/royalties and the expansion of tourism. 1/ Given the present foreign investment climate, net private capital inflows can be expected to increase by only ten percent per annum on the very small 1976 base. - 408 - Table 12.6: MERCHANDISE EXPORT PROJECTIONS FOR SELECTED YEARS (1976-85) (millions of Syrian pounds) Scenario I Scenario II 6 percent per annum real growth 3½ percent per annum real growth In merchandice exports (1976-85) in merchandice exports (1976- 80) 1976 1977 1980 1985 1976 1977 1980 1985 1. In current prices Petroleum 2586 2359 3039 4900 2586 2281 2718 3601 Cotton 638 916 1038 1456 638 916 1038 1456 Textiles 295 411 1087 2524 295 411 1087 2524 Phosphate rocks 43 28 79 204 43 28 79 204 Other 580 730 1501 4603 580 730 1501 4603 Total 4141 4440 6744 13687 4141 4366 6423 12388 2. In constant 1975 prices 1/ 2/ 1/ ~~~~~~~4/ Petroleum 2512F 2091-1 2176 25021/ 2512 1968- 1864 1761 Cotton 45C- 7023 702 702 -E 450 7023/ 702 702 Textiles 231l/ 313 611 10111l/ 237 313 611 1011 Phosphate rocks 791! 60 122 197 1, 79 60 122 197 Other 5774! 674 1116 2441- 577 674 1116 2441 Total 38551/ 3840 4727 6857-/ 3855 3717 4415 6112 1/ The corresponding figures in thousands of metric tons are: for 1976: Petroleum 9662, cotton 118, textiles 25, phosphate rocks 421, ot'her 732, total 10949 for 1985: Petroleum 9625, cotton 180, textiles 97, phosphate rocks 1925, other 2870, total 14686. 2/ In this scenario petroleum exports are projected to decline only to 1978, then to gradually return by 1981 to the 1976 export levels assuming an increase in domestic petroleum production. 3/ Despite increasing domestic requirements for textile production, raw cotton exports are projected to remain constant assuming an increase in domestic production. 4J The petroleum projections in this scenario are based on Table SA8A.12, except that beginning in 1985 it is assumed 1.4 million cubic meters of gas will be utilized as feedstock for chemical plants to produce 1.3 million tons of refined products (see footnote 2 para. 12.35) thereby releasing an equivalent volume of petroleum products for exports, to be added to the 0.3 million tons of petroleum exports projected for 1985 in Table SA8A.12. Source: World Bank Estimates - 409 - Table 12.7: MERCHANDISE IMPORT PROJECTIONS FOR SELECTED YEARS (1976-85) (millions of Syrian pounds) Scenario I Scenario II 5 percent per annum real growth 3 percent per ainum real growth in merchandise imports (1976-85) in merchandise imports (1976-85) 1976 1977 1980 1985 1976 1977 1980 1985 1. In current prices Food 1452 1455 2095 3460 1452 1554 2224 3710 Other consumer goods 1742 1527 2225 4079 1742 574 848 1490 Petroleum 828 715 1178 2661 828 797 1805 2926 Other intermediate goods 2218 2583 3823 7519 2218 2555 3889 7500 Capital goods 2586 2983 4415 7903 2586 2958 4203 6540 Total 8826 9261 13736 25621 8826 8438 12969 22086 2. In constant 1975 prices Food 14451' 1503 1740 21371' 1445 1436 1655 1969 1/ 2/ Other consumer goods 1734- 1301- 1526 19951' 1734 5301' 630 747 Petroleum 7701/ 693 923 14861/ 770 688 1238 1431 Other intermediate goods 22071- 2384 2839 39821- 2207 2362 2893 3979 Capital goods 25731/ 2753 3276 41851/ 2573 2734 3126 3469 Total 87291' 8604 10264 137091/ 8729 7730 9544 11595 1/ The corresponding figures in thousands of metric tons are: for 1976: Food 996, other consumption goods 121, petroleum 2428, other intermediate goods 1154, capital goods 195, total 5294 for 1985: Food 1473, other consumption goods 140, pe roleum. 5255, other intermediate foods 2081, capital goods 318, total 9267 2/ The base year has been adjusted by projecting a one year decline to partially offset the distortions created by the import of SL 1.4 million of gold in 1976, assuming part of it represented other non-recorded imports. 3/ The base year has been adjusted by projecting a one-year decline to totally offset the distortions created by the import of SL 1.4 million of gold in 1976. This scenerio assumes in addition to the assumption recorded in footnote 2 above that the import of certain consumption items, such as vehicles (which representedl SL 600 million of imports in 1976 and of luxury goods, will bo curtailed until the availa- bility of foreign exchange increases. Source: World Bank Estimates - 410 - Table 12.8 NET-EXTERNAL CAPITAL REQUIREMENTS FOR THE PERIOD 1976-85 ASSUMNG IN CURRENT PRICES DIFFERENT LEVELS OF AVERAGE GROSS DOMESTIC_SAVINGS (in billions of Syrian pounds) Scenario I Scenario II Avg. GDS level(/t 9 6-85) Avg. GDS level C176-85) Actuali'Y/ 9.5% of GDP5-- 14.5%_of GDP/8/ 1971-75 1976-80 1981-85 1976-80 1981-85 A. National Accounts: Gross Domestic Product (Mp)-7 59.8 1 0. 344.1 170.2 344.1 Gross Domestic Savings 9.8 17.4 31.2 24.3 50.8 less: Gross Domestic Investment4/ -14.7 -49.5 85.2 -49.5 -85.2 equals: Resource Gap - 4.9 -32.1 -54.0 -25.2 -34.4 B. Balance of Payments Export of Goods plus Non-factor Services 14.2 29.5 57.8 31.8 66.9 less: Import of Goods plus non-factor services -19.1 -61.6 -111.8 -57.0 -101.3 equals: Resource Gap - 4.9 -32.1 - 54.0 -25.2 - 34.4 Plus: Net Factor Income from abroad 1.0 - 0.7 - U7.7 - 0.4 - 2.9 plus: Net Current Transfers from abroad 5.8 9.4 13.3 11.4 13.6 (of which official grants) (5.6) (8.5) (10.5) (10.5) (11.2) equals: Current Account Balance 1.9 -23.4 -48.4 -14.2 -23.7 plus: Change in Reserves (-increase)9' -2.1 1.4 - 0.5 0.2 - 0.8 plus: Errors and Omissions -1.5 - - - - equals: Net External Capital Require- 1.7 22.0 48.9 14.0 24.5 ments (of which public) (1.4) (20.7) (46.1) (13.7) (23.8) 1/ Table SA2B.4 for National Accounts 2/ Table SA3B.1 for Balance of Payments 3/ Assuming an average long-term six percent per annum compound growth rate 4/ Assuming an investment of SL 35.0 million and SL 41.0 million in constant 1975 prices for the two periods 1976-80 and 1981-85, respectively. 5/ Assuming a 6 percent per annum real growt- rate in merchandise exports (Table 12. 6) and no real growth in non-factor services 6/ Assuming a 5 percent per annum growth rate in merchandise imports (Table 12.7), that is an average import elasticity of 0.85. 7/ Assuming a 3.5 percent per annum growth rate in merchandise exports (Table 12.6), and a 9 percent per annum growth rate in non-factor services to reflect the resumption of petroleum and other transit dues, and an increase in tourism. 8/ Assuming a 3 percent per annum growth rate in merchandise imports (Table 12.7), that is a very low average import elasticity of 0.50. 9/ Gross Reserves in 1976 were SL 1.P billion and Net reserves non-existent (or negative). The change in reserve are based on the assumption that gross reserves for any year will be held at 2.5 months of imports in tnat year. Source: World Bank Estimates _ 411 - Table 12.9: .U.Um PUB.IC U3NIIBZ 3pIRUNTS AND NOULTING DEBT JWDEN (197t6-85) ASSlBIIlG DlMi Nr LIVEK Of AVERAGE GROSS DOMESTIC SAVlNGS 1N CURRE?r PRICES (in billions of Syrian Pounds) Scenario IScaro1 1/ Average GDP Level (1976-85) Avrg DS Level (1976-S5) Actual -/ 8 5% of GDF _ 12. of GDP 1971-75 1976-80 I9i.I85 197 1981-as A. External Publie Borrowinn gross 2.4 23.5 57.4 16.6 32.3 net 1.4 20.7 46.1' 13.7 23.8 1. From extsting comi_tentx a. groes disbursments 2.4 7.3 . 0.4 7.3 0.4 b less: _ortiation -1.0 -2.6 -4.0 -2.6 -4.0 c. equals: net disbursemnts 1.4 4.7 -3.6 4.7 -3.6 d. less: interest thuargs -0.2 -0.9 -1.2 -0.9 -1.2 e. equals: net transfer 1.2 3.8 -4.8 3.8 -4.8 2. Prom required new coinituent. a. gross disburseents - 16.2 57.0 9.3 31.9 b. less: smortisation - -0.2 -7.3 -0.3 -4.51 c. equals: net diabursesents - 16.0 49.7 9.0 27.4 d. lees: interest charges - -1.1 -9.4 -0.6 -5.2 e. equals: not transfer - 14.9 40.3 8.4 22.2 B. External Public Debt lurden: 1. Debt service: a. asortination 1.0 2.8 11.3 2.9 8.5 b. interest charges 0.2 2.0 10.6 1.5 6.4 C. total 1.2 4.8 21.9 4.4 14.9 2. Exports: a. mercbandise / 9.8 23.2 49.3 25.1 48.5 b. non-faeor services 4.4 6.3 8.5 6.7 18.4 c. total L 14.2 29.5 57.8 31.8 66.9 3. Debt Service Ratio (le f 2c): (2) 8.5 16.3 37.9 13.8 22.2 I/ Table SA3B.I and SA3C.1 2/ Table SA4.1 s/ Ansming overage terms of three years grace. 12 yesrs repaymnt and 5 percent interest on new citnents required to cover deftLcit between external public borrowing requirements and diabursaents frm existing citments. 4/ Table 12.6 _/ Table 12.8 Source: World Bank estimates. - 412 - portion of tax revenue in the period came from the increasing yield of import duties, which itself depended on the ability to finance rising imports. Another important source was public enterprises surpluses, the bulk of which came from the increase in the export price of petroleum (not so much from the increase in its production), a one shot increase of a fortuitous nature. Already in 1976, despite an increase in the production and export of petroleum, the GDS rate had declined to ten percent of GDP. 1/ Thus, it is clear that petroleum and foreign financing, not development itself, made possible the high level of savings during the Third Plan period. In the scenarios to follow it is assumed that the average GDS rate will not be as high as it was during the Third Plan period. However, what differentiates the scenarios is the level to which the average GDS rate is assumed to decline. 12.56 Scenario I. The major adjustments to the general assessment of merchandise trade (paragraphs 12.40-12.50) made in this scenario are as follows: On the export side petroleum exports are projected to decline only to 1978, then to gradually return by 1981 to the 1976 export levels, assuming an increase in domestic petroleum production. Similarly, despite increasing domestic requirements for textile production, raw cotton exports are projected to increase by 50 percent, also assuming an increase in domestic production. By stabilizing the export levels of these two primary export-earners overall merchandise exports could grow at over 4 percent per annum in the period 1976- 80 (see Table 12.6) and 7.5 percent thereafter. 2/ Non-factor services are not assumed to grow in real terms. On the import side the overall elasticity of imports with respect to GDP is assumed to drop below 1.0 to 0.65 for the period 1976-80 but returning to about 1.0 thereafter (see Table 12.7). Despite the improvement in exports and reduction in imports, the resources gap remains relatively large at 17 percent of GDP during 1976-80, declining to 13 percent of GDP during 1981-85 (see Table 12.8). The Gross Domestic Savings rate during the period 1976-85 is assumed, as a corollary, to be in the order of only 9-10 percent. 12.57 In this scenario the overall public borrowing requirements and repayments (in the form of amortization and interest) can be generated (see Table 12.8) from which new public borrowing requirements can be derived (see Table 12.9). 3/ As is apparent from these tables, in the absence of other policy measures to improve the Gross Domestic Savings rate, Syria could face a short-term and medium-term foreign exchange problem. The gross public 1/ Gross National Savings also declined with a substantial drop in current unrequited transfer receipts. 2/ No real growth in non-factor service exports is assumed. 3/ As the difference between total public borrowing requirements and the disbursment/amortization profile of existing commitments in Table SA 4.1. The new disbursements are assumed to have on average a three year grace period, a twelve year repayment period and an interest rate of five percent per annum. - 413 - borrowing requirements, in the form of disbursements, would have to be approx- imately ten times as large during the Fourth Plan period (1976-80), as they were during the Third Plan (1971-75) period, two-thirds of which would have to come from new commitments. Even though, as mentioned in paragraph 12.29, the level of gross public disbursements jumped fourfold between 1969-72 and 1973-76 during a period of relatively abundant funds, it appears difficult to imagine that the Syrian authorities could mobilize and implement a tenfold increase in gross public disbursements between the two Plan periods. 12.58 The consequence of this level of borrowing during the Fourth Plan period (combined with the spending spree between 1973 and 1976) will be manifested in the debt service ratio 1/ in the early to mid-80s. If to the debt servicing pressure engendered by the substantial external borrowing that has already taken place or is likely to take place in the years 1973 through 1980, is added the debt servicing pressure of the resource gap during t:he Fifth Plan period (even though it is expected to decline), the debt-service ratio could become totally untenable by 1985. In short, there is no alter- native to a substantial but well-thought-out retrenchment in the growth of aggregate demand, and therefore of imports, during the next few years. 12.59 Scenario II. In this scenario it is assumed that raw cotton exports would be the same as in scenario I but that petroleum exports would dezline as projected in Table SA 8A.12. 2/ As a result, merchandise exports are projected not to have a real growth exceeding 3.5 percent per annum during the period 1976-85. They are, however, expected to grow more rapidly at 6.7 percent after 1980. Non-factor service earnings in this scenario are projected to grow at the same rate as merchandise exports 3/ to result in larger overall export levels than in scenario I (see Table 12.8). On the other hand, imports are projected to grow at only two percent per annum (substantially below the growth rate of exports and of GDP) during 1976-80 period to reflect a better Gross Domestic Savings performance, in the order of 14.5 percent of GDP, than in scenario I (see Tables 12.7 and 12.8). Again, despite additional improve- ments in the export performance of goods and non-factor services, and the further reduction of imports relative to scenario 1, the resource gap will not return to the Third Five-Year Plan level of 8 percent of GDP until the 1981-85 period, after averaging 13 percent of GDP during the Fourth Five-Year Plan period. 12.60 In this scenario, the gross external public borrowing requirements are still large in comparison to the Third Five-Year Plan (see Table 12.8), 1/ The Debt Service Ratio is defined as the ratio of repayment (amortization plus interest charges) to the export of goods and non-factor services for a given year (or period). 2/ With the proviso stated in footnote 4 of Table 12.6. 3/ Reflecting the assumption that petroleum and other transit dues will resume and tourism will grow rapidly. - 414 but as seen in the debt-service ratio their consequences for the Government's ability to manage its debt are not as severe, if the funds can be obtained. What emerges from this exercise is that improving the Gross Domestic Savings rate, through appropriate policies to reduce the growth rate of consumption, and drastically reducing the rate of growth of imports relative to their rate of growth during the Third Five-Year Plan period is likely to be more effective than relying on the stabilization of Syria's current primary export earners while allowing the Gross Domestic Savings rate to continue its headlong drop. BASIC RECOMMENDATIONS 12.61 As suggested in the discussion on developments during the Third Plan and in 1976, the recent large and sudden increase in aggregate demand relative to domestic output has increased the resource gap to levels unsustainable for long periods. The rapid growth in Aggregate Demand stimulated a substantial increase in imports (and a reduction in some exportables) to meet domestic requirements and thereby limit the rate of inflation. 12.62 It should be clear from the discussion in paras. 12.54 to 12.60 that it is necessary for Syria to restore balance of payments equilibrium as rapidly as possible to improve the prospects for managing her external debt. Other- wise, the balance of payments constraint on the sustainable rate of growth of output will become progressively more severe as the structural imbalance in the merchandise trade account persists. 1/ By definition, the growing resource gap cannot be reduced unless output grows more rapidly than aggregate demand (which is equivalent to having imports grow less rapidly than exports). 2/ The following basic recommendations are suggested in order of priority (preferably to be implemented as a package): Decelerating the Rate of Growth of Imports 12.63 There is no doubt that should the volume of Syria's primary export commodities decline substantially in the future, then even with unusually rapid growth in other exports items, Syria would be in no position to sustain a large growth rate in imports without increasing the pressure on the government to obtain grants (transfers) or loans (capital flows) from abroad to finance them. 12.64 It is clear that if both exports and imports grow at the same rate as GDP the resource gap will remain at its present high level which is not 1/ That is, a continuation of present trends and policies will lead to an untenable economic situation and the need to implement a drastic slow- down in economic growth, at the latest by the early and middle 1980s. 2/ To facilitate closing the resource gap the growth rate of imports must be considerably less rapid than that of output (GDP), if imports are allowed to grow at all, while the growth rate of exports must be as rapid as that of output (GDP), if possible. - 415 - sustainable for a long period. If imports grow more rapidly that GDP (with an elasticity greater than one) and more rapidly than exports, then the raitio of imports to GDP and the resource gap to GDP will both increase resulting in even more unsustainable borrowing requirements and the mortgaging of the country's future. 12.65 Therefore, imports should grow less rapidly than exports to gradually close the large resource gap. If exports could grow more rapidly than GDP, it would be possible for the import elasticity to be greater than one witb respect to GDP and still grow at a slower rate than exports. However, in that case the resource gap would only decline very gradually. Therefore, it is preferable that the overall import elasticity with respect to GDP be substantially less than one. This will necessitate the reimposition of relatively stringent import controls, at least temporarily. 12.66 If export growth rates are much lower than GDP growth rates l/ it may even be necessary for the magnitude of overall imports to level off at the high 1976 import levels (i.e. for the import growth rate to drop to zero). Since the 1976 ratio of imports to GDP is fairly high (40 percent), it may still be possible to maintain a steady, but lower than 6 percent p.a., GDP growth rate with a declining ratio of imports to GDP, if substantial and judicious restruc- turing in the composition of imports is undertaken. 12.67 A meaningful set of priorities to control the expansion of imports without seriously impeding the rate of growth in national income can be imple- mented only if the rate of growth of consumption is reduced and a modified Fourth Five-Year Plan investment program is developed on the basis of a very careful scrutiny of the import requirements by project and sector. In this context, it is important that the slower growth rate in imports not result in an inadequate supply of basic consumer needs and/or input requirements neces- sary for the utilization of existing productive capacity, or the formation of new productive capacity which would only curtail the growth rate of output. In addition, it will be necessary to bring on stream new productive capacity which is export-oriented (a medium term measure), if the import controls are to 1/ Export growth rates might be stimulated in the short run with a reduction of administrative controls on the private sector, however, the rate of liberalization of private sector imports may have to be slowed down, in conjunction with a restriction of public sector imports, until future debt management prospects improve. - 416 - be a purely temporary means of dealing with Syria's present balance of payments disequilibrium. 1/ Improving Domestic Resource Mobilization Capabilities Relative to Domestic Investment Requirements 12.68 This is really another way of looking, with an extension of the time horizon, at the previous recommendation. In the past the government has been unable to mobilize sufficient domestic savings for investment purposes. 2/ As a result, the country's present investment program and future growth rate is subject to a binding foreign exchange constraint. 12.69 With reserves exhausted and the resource gap large (16 percent in 1976) and possibly growing in the future, there is an immediate need for the government to take stringent measures to control aggregate demand. To ensure a slower growth in aggregate demand relative to output, public and private expenditures including both consumption and investment will have to be scaled down, to meet budgetary constraints, and thereby contribute to a reduction in import growth rates. This reduction in the growth of aggregate demand will have to be judicious to ensure minimal disruption to the long-term growth of output as insufficient demand can lead to under-utilization of current pro- ductive capacity or under-investment in future productive capacity. 12.70 To ensure greater availability of domestic resources for the currently required level of investment, Gross Domestic Savings will have to be increased in both the private and public sectors: (a) In the private sector: The government's tax effort will have to be increased to reduce private consumption (see Chapter 11, Monetary and Fiscal Policies). This effort will 1/ Given the problems associated with too rapid a retrenchment of imports it appears, therefore, that in the short run there will continue to be pressures to increase aid through transfers, and possibly to reschedule or roll over existing debts (or to convert them into outright grants) to keep the repayment consequences in the future of a continuing large resource gap manageable. The transformation of existing foreign debts into outright grants might be sought from donors who are not in immediate need of repayment, e.g. OAPEC donors, particularly if the petrodollar- generated surplus liquidity in the region does not contract rapidly during the next decade. It should be noted, however, that the relief in repayments from such a course of action will not be as substantial as the share of disbursements from OAPEC sources due to their already more favorable terms relative to the debt contracted from other sources (see Tables SA4.3 and SA4.5). 2/ In aggregate terms, gross domestic savings recorded in the national accounts was only 10 percent of GDP in 1976, most of it from the private sector (See Table SA2B.4.). - 417 - have to be complemented by a gradual reduction of consumption subsidies of "necessities" to non-poverty groups. In addi- tion, the opportunity and attractiveness of saving via financial intermediaries and the sale of bonds will have to be increased through the use of appropriate interest and dis- count rates. (b) In the public sector: The financial and socioeconomic cost - accounting procedures of public 1/ enterprises will have to be improved in order to increase their efficiency and their ability to self-finance investment rather than drain on budgetary resources (see Chapters 9 and 10). It will also be advisable, in the context of improving the tax effort, to eliminate indirect subsidies in the form of exemptions from the payments of customs duties, particularly for turnkey projects and selected types of capital goods, andl instead to transform the subsidies into direct budgetary allo- cations if they are deemed desirable and necessary. This will facilitate a clearer analysis of the cost to the economy of various subsidies to the different sectors and the different production technologies within each sector. Developing Foreign Trade Perspective Planning and Budgeting Capabilities 12.71 In the context of continued administrative controls on trade, it is essential to develop a perspective import/export plan and foreign exchange budget for the public sector, and preferably for the economy as a whole, on a regular basis in addition to the current annual trade plan and foreign exchange budget (which will have to be strengthened and given more substance). It is essential to link physical and financial planning in order to avoid the consequence of the present approach of programming without constraints. In particular, the foreign exchange budget should be based on a realistic appraisal of grant receipts and likely capital borrowing 2/ possibilit:ies. 12.72 To institutionalize effective planning, public enterprises and pri- vate Chambers of Commerce and Industry should be encouraged to define import requirements and export potential in advance, ready to be communicated to the appropriate authorities. The submissions of the general organizations have 1/ Financial and cost accounting procedures in private enterprises will also have to be improved. 2/ The domestic financial impact of the proposed expenditure levels sup- ported by the external borrowing and aid should also be taken irto account. It might have been possible to avoid the present foreign exchange constraint (which is likely to contribute to a slowdown of economic growth, at least temporarily) and the future high debt burden that is expected to result from the large external borrowing in the last few years had perspective planning of imports, exports, and foreign exchange requirements been institutionalized. - 418 - thus far been based on mechanically calculated commodity balances without reference to any analysis of input and output markets at home or abroad. As a result, output and export possibilities are exaggerated, and enterprises are inadequately encouraged to meet anticipated targets. More realistic market research is necessary to determine (a) the availability of inputs at the appropriate time to sustain a given level of capacity utilization, and (b) the domestic and foreign sales potential for a given level of output to avoid the unnecessary build-up of stocks or the underutilization of capacity. 12.73 An aspect of this recommendation would require that investment pro- gramming (at both the macro and the project level) take into account the current and future international trade impact of the program and the project. For example, the import requirements for the investment and current operation of each import-substituting project should be analyzed to obtain some measure of the cost to the economy of an import substitution strategy for final con- sumer goods. Instead of saving foreign exchange, the strategy might lock the economy into increasing the imports of intermediate goods (resulting in a larger overall import bill) for an indefinite period. The same holds true for export-oriented projects. The net foreign exchange savings from a project is more important than the gross foreign exchange savings. As a result, account must be taken of both the realizable export potential (foreign exchange earning capability) of any productive investment and its import requirements. Expanding the Role of Financial Policy 12.74 During the recent growth in the resource gap, traditional balance of payments adjustment mechanisms (which operate indirectly), such as fiscal and monetary (and pricing) policies, have only rarely been used to close the gap. There is no doubt that traditional adjustment mechanisms are unlikely to be effective as long as the private sector is relatively small, foreign trade is a public monopoly, foreign investment is not sought after, and the public sector enterprises as well as government agencies have unlimited access to the budget and credit facilities. In these circumstances such monetary policy mechanisms as variations in interest rates (to facilitate interest-sensitive capital flows) can have little effect. However, this state of affairs may have to be gradually altered, particularly if the private sector becomes a more important element in domestic investment, production and foreign trade (in 1975 and 1976 it accounted for approximately 30 percent of non-petroleum exports and about the same proportion of total imports). The private sector is much more sensitive than the state-administered sector to indirect mecha- nisms such as interest rate or exchange rate adjustments. 12.75 Moreover, if the management of public sector enterprises is required to operate increasingly (but not exclusively) along private sector lines to increase efficiency in the utilization of resources, it will be necessary to utilize price signals (in the context of improved cost accounting) more fre- quently than has been done in the past. This would also make it necessary to - 419 - curb the public enterprises' ability to contract debt independently and to have unlimited access to credit facilities to finance imports. Both these practices have contributed to the current squeeze on the foreign exchange budget and the future debt servicing capacity of the country. 12.76 Devaluation, a traditional adjustment mechanism for structural dis- equilibrium in the balance of payments does not appear to be relevant in Syria's present institutional set-up unless it is accompanied by other changes in the system of pricing (see Chapter 5). Petroleum exports, which account for 70 percent of merchandise export earnings are declining for reasons unre- lated to external demand as mediated by the exchange rate. The level of production and export of raw cotton and many other export commodities are not sensitive to changes in the exchange rate, as the private and public producers respond to domestically controlled prices. 12.77 Similarly, Syria's imports are mainly purchased by the public sector in the form of capital goods for investment purposes or intermediate goods necessary to utilize existing production capacity. As the public enterprises lack appropriate financial accounting mechanisms, and their purchases can be covered by budgetary transfers or unlimited access to domestic borrowing from the banking system through credit facilities, it is unlikely that a change in the exchange rate alone will affect their pattern of imports. At present, the increased cost to the enterprise of imported inputs is likely to be passed on to the consumers (thereby affecting aggregate demand) only in areas where controlled prices are inoperative. More probably the cost will be passed on to the budget or the banking system. 1/ Whereas this assessment excludes devaluation as a useful adjustment mechanism in the short run it does not exclude the need to investigate this possibility in the medium-term. Promoting Exports 12.78 Except for petroleum and cotton, Syria's exports have consiLsted of residual surpluses in goods primarily produced for the domestic market. That is, Syria's production structure is not export-oriented. Since Syria's domestic market is relatively small, however, she has been unable to take advantage of economies of scale to produce goods that are internationally competitive. In the past, the government has also hesitated to encourage investment in industries that are primarily export-oriented for fear of 1/1 The only areas in which a devaluation might more rapidly help t:he balance of payments position is in merchandise trade by the private sector in private-sector produced commodities, and in some non-factor services, such as tourism. - 420 - repercussions on domestic output and employment from fluctuations of demand in foreign markets which they cannot influence or control. 1/ Although the reasons for these past policies are understandable, it is clear that as long as Syria's growth is dependent on imports (particularly of intermediate and capital goods) the economy will have to develop the capacity for expanding exports to pay for these imports. 12.79 Approximately 70 percent of Syria's export commodities other than petroleum are produced in the private sector; but with the exception of perishables most of them are exported through state trading organizations. In this context, export promotion would necessitate the establishment of a relatively complex program addressing the separate needs of each sector. 12.80 To stimulate public sector exports a number of incentive systems could be adopted patterned for example on various Yugoslav methods (after reviewing their strengths and weaknesses). These could include: (1) a quota system for retention of foreign exchange earnings by the public sector enterprises; (2) a system of rebates on import duties for these industries; (3) a system of import quotas for the inputs of these industries. In all cases the incentives would have to be linked to the level of output and the export performance of the enterprise. 12.81 To stimulate private sector exports a number of additional incentive systems could be adopted after a careful review of their applicability to the Syrian context. These could include (in addition to the items mentioned to encourage public sector enterprises): (1) tax rebates or holidays on export-oriented investment; (2) the payment of higher prices (sensitive to exchange rate variations) in local currency to private producers by state purchasing organizations thereby indirectly transmitting international price signals to the producers (for example, for commodities such as raw cotton, ...); (3) direct export contracts by Syrian enterprises with foreign purchasers. 1/ The repercussions on domestic output and employment as a result of fluc- tuations in foreign markets (transmitted through export-oriented indus- tries) can be dampened by emphasizing income inelastic products and diversifying the export base. This is particularly the case if the fluc- tuation in the foreign market is commodity specific and not a result of a recession in the foreign economy. - 421 - Again the incentives would have to be linked to the level of output and the export performance of the enterprise. 12.82 To administer and continuously update this program it would be neces- sary to create either a special Export Promotions Department in the Ministry of Economy and Foreign Trade, or a new Export Promotion Bank. In either case it would be necessary actively to seek out markets and then regularly publish an analysis of foreign market opportunities for existing Syrian products, and domestic investment opportunities to produce new export-oriented products in Syria (and if possible to review the feasibility of such investment projects in conjunction with the appropriate ministry or with the SPC). Developing and Implementing a Clear Set of Policies on the International Mobility of Factors of Production 12.83 As the potential for the international mobility of factors increases in the Middle East it will be useful (perhaps even indispensable) for Syria to develop and implement a clear and coherent set of policies consistent with her own development objectives. Real estate speculation (fueled by workers' remittances and foreign private capital flows from the Gulf states) and the loss of professional and skilled manpower critical to Syria's development program, have thus far been the primary responses of the socioeconomic system to the regional pressures generated to induce the international mobility of factors. Mobilizing the foreign exchange remittances of migrant workers for investment purposes domestically and facilitating the flow of the grcwing liquidity in the region into productive ventures in Syria is desirable from both the economic and the balance of payments standpoint. 12.84 It appears that an organizational structure (for example, a depart- ment within the Ministry of Social Affairs and Labor, but linked to l:he SPC) is needed to facilitate and manage labor mobility by providing a meaningful rotation program. This program could on the one hand provide a means for enhancing the learning opportunity and supplementing the wages of individual workers and technicians; on the other hand, it could provide a mechanism to mobilize part of the workers' remittances in the form of equity shares or bond purchases by those placed abroad by the organization and channel them into long term private or public productive investments rather than consumption. It could also be empowered to look after the socioeconomic interests of Syrian workers abroad. I/ 12.85 To facilitate the movement of private capital (particularly Arab capital) into Syria, the present investment approval system would have to be streamlined (to reduce red tape), and the foreign investment code would have to be consolidated. An aggressive publicity campaign might have to accompany 1/ Of course, measures would have to be adopted and incorporated into the functioning of the organization to prevent abuse in the form of corrup- tion or favoritism. 422 - these changes to make potential investors aware of the investment code provi- sions for direct and joint ventures in Syria or in the numerous Free Trade Zones that Syria is establishing at considerable cost (with all the necessary infrastructure and housing facilities required by investors). 1/ Improving the Data Base for Foreign Trade and Balance of Payments Analysis 12.86 To facilitate foreign trade planning and budgeting on the one hand and the formulation of balance of payments policies with reference to quantitative indicators on the other, it is necessary that these indicators be timely as well as conceptually and statistically sound. Most data series in the Syrian Arab Republic (for example, balance of payments, national accounts, ...) are collected on an annual rather than a quarterly or monthly basis, and are made available only after a considerable lag. 2/ Moreover, many transactions in the balance of payments seem to be unrecorded or inappro- priately recorded, 3/ with the result that the only really solid piece of information in the balance or payments is the change in the level of reserves. It is obvious that this piece of information alone is insufficient for the formulation of appropriate policies directed at the various balance of pay- ments components. 1/ Since this was written the Government of Syria took just such a step and bought a full page advertisement in the New York Times. 2/ Hence decisions have to be made with limited reference to data on whose preparation much time, energy and money has been spent. 3/ For details see Volume 3, Annex 1 (International Trade and Finance). - 423 CHAPTER 13 TOWARDS A DEVELOPMENT STRATEGY: FEASIBILITY, CONSTRAINTS, AND POLICY ISSUES 13.01 The Fourth Five Year Plan 1976-1980 was formulated during a period of comparative ease in the balance of payments and in the availability of investment funds. The time when the Plan was formulated was also a period that saw an extraordinary mixture of unfavorable and favorable events, with the favorable events probably dominating economic developments in the short run. The 1973 war left substantial destruction in productive capacity which was not entirely made good until 1975. It left additional burdens on the economy in terms of increased defense expenditures and the withdrawal of part of the active population for army service. The civil war in Lebanon and the subsequent Syrian intervention put further strains on the economy. On the other hand, Syria had three excellent crop years in a row, and it not only received Arab aid for its military needs, but also substantial inflows of capital for economic purposes. As a result, 1974 and 1975 were, comparatively speaking, boom years, which may in part account for the optimism eviderLt in the original formulation of the Plan. In contrast, the revisions in the Plan and the prospects for executing the ideas of the Plan were influenced by the substantial deterioration that took place during 1976. In response to the substantially lower expectations of future resource availability than had been anticipated at the time the Plan was formulated, the Government, in April 1977, shortly after the Plan was formally approved, decided to restrict public investments only to on-going projects, in order to respond to the challenges created by the new situation. 1/ These problems and perspectives are con- sidered below. SHORT-TERM ADJUSTMENTS TO THE PLAN 13.02 The government's decision to execute only the ongoing projects, leaving all the new projects as "reserve" projects for a future plan will reduce the projected 1976-80 public investment to SL 27.2 billion. Secondly, the Government is trying to deal with the cash flow problem by allocating money only where absolutely needed and only for that portion of a project that is actually being implemented. Before, during the years of monetary and balance of payments ease, it was apparently fairly easy to get funds for future implementation just by asking for them. Third, all payment for already expropriated land is being postponed, and so are new plans for carrying out such appropriations. Finally, transport facilities within the government are to be "rationalized"--a term frequently used--by not purchasing new cars or trucks unless specially justified. No quantitative estimates exist cf the 1/ In view of this, a detailed analysis of the Fourth Five Year Plan is relegated to Appendix 13A to this Chapter. This chapter draws upon the work of Mr. Wolfgang Stolper (Consultant). - 424 - saving to result from decisions two to four. It is possible that they save SL 1 billion. Obviously, the government is also thinking along other lines; in fact, the drastic decision to cut the investment program by one-fourth is a step to gain breathing space while other short-run and longer-run steps are being undertaken. 13.03 It should be pointed out that the composition of the remaining investments would eliminate virtually all social projects, or rather would leave virtually all social investment expenditure, particularly in housing, to the private sector. This may be a politically difficult decision that never- theless had to be made. It is, however, defensible even from a purely eco- nomic standpoint only if the "economic" investments in fact have a good chance to increase productive capacity and production. 13.04 Given the fact that many projects have been included in the Plan without a proper calculation of feasibility or cost-benefit--and in some cases even without a cost-effectiveness study--this is extremely doubtful. In Chapter 10, quite a few expenditures on industrial expansion were identified which cannot pay off. It is one thing to sell abroad inventories of manufac- tures that have accumulated at any price they will fetch. It is something quite different to add to an already existing excess capacity in order to sell the product at home or abroad at a loss, requiring subsidies, particu- larly when the imported components would cost more than the foreign exchange recovered by distress sales. A case in point is production of television sets whose domestic inventories are big because the sets, being a luxury, are kept at a high price, yet whose capacity is to be further expanded. This is an assembly operation with a high import content. 13.05 Similar arguments have been made against the expansion of cement capacity which would, if carried out, allow Syria to produce a multiple of European per capita consumption, the demand for which is difficult to visualize. Similarly it is difficult to see to what markets either the cement surplus or a surplus of trisuperphosphate fertilizer might be exported. It may in fact be cheaper to stop already started work, for example on the Sheikh Said or Tartous cement plant (two plants that were started in 1975 and 1976 respectively after some delay, and which are expected to be finished only in 1979 and 1980 respectively) than to finish them at all cost, while not providing, say, low cost housing or some rural electrification. This observation applies also the Homs trisuperphosphate and Homs Ammonia Urea plants, whose construction was to have been started in 1975, but seems to have been started only in 1976. 13.06 It is, in other words, essential that the government reconsider imme- diately and systematically all industrial projects and in general all directly productive projects that are not too far advanced, to eliminate "losers" and to speed up the potential "winners" as well as to free funds for essential social services. The government is aware that the short run problem is to limit expenditures and get funds any way it can, in order to make a fresh start in 1980. The difficulty with this approach is that the short and the long runs are more closely intertwined than that; one has to start anew imme- diately in order to start anew in 1980. Plans may be published at discrete - 425 - intervals; reality is a continuous process. The problem is to gain an imme- diate breathing space and to start immediately to turn the economy around. 1/ 13.07 The immediate problems include raising funds and reducing expendi- tures by all means feasible. Two-digit inflation is not tolerable for any length of time. But it would not solve the problems in any case as long as investments have a very high import content. The point can be immediately clarified by showing that, even in the short run, the proposed cutting of the investment program to ongoing projects and the additional reduction of expendi- tures by SL 1 billion is not enough. 13.08 The new balance of investments to be financed and means of financing them would at least initially look as follows: Table 13.1: ONGOING PROJECTS TO BE FINANCED AND MEANS OF FINANCING, 1976-80 (Billions of Syrian Pounds at 1975 prices) 1. Total Ongoing Projects (Plan) 27.2 a. Less: Slippage of 10% - 2.7 b. Less: Other Savings - 1.0 Remains to be Financed 23.5 2. Surpluses of Economic Establishments 19.7 a. of which petroleum (8-7) 3. Surpluses of Recurrent Budgets 3.8 4. "OtherT' Resources 0.5 24.0 5. Apparent Surplus C..5 Source: World Bank calculations based on data supplied by the State Planning Commission. 1/ Of the projects involving total cost of SL 200 million or more-- admittedly an arbitrary cut-off point--the Euphrates Dam, or Meskenah (actually started in 1973) should be finished. Although Euphrates Basin development was started in 1968 and is to be finished during the Sixth Plan (i.e. after 1985), clearly there is considerable flexibility in the actual execution, which could be adjusted in the light of newer informa- tion. The major transport projects also allow some flexibility in execu- tion. Industrial projects have been mentioned in the text. Clearly there is considerable flexibility in the execution of existing projects, and not all "ongoing" projects have apparently in fact been started. - 426 - 13.09 Unfortunately this calculation is somewhat premature. In the first place, the government anticipates a state of inflation of 6 percent p.a. Assuming the SL 23.5 billion to be spread more or less evenly over the 5 years, with SL 5 billion being executed each of the years 1976-1979, and 3.5 billion in 1980 the total cost would--under these unrealistically favorable assumptions--escalate to SL 27.9 as follows: Table 13.2: COST OF ONGOING PROJECTS, ASSUMING INFLATION OF SIX PERCENT A YEAR, 1976-80 /1 (Billions of Syrian Pounds) Year Cost 1976 5.30 1977 5.62 1978 5.96 1979 6.31 1980 4.68 /1 Note that actual inflation rates are likely to be much higher--according to estimates presented in Chapter 11, Appendix llB--thus raising cost even higher. Source: World Bank calculations. 13.10 On the other hand, the surpluses of public economic enterprises would not increase at all, or not much, with inflation as long as the present price policy is in force which maintains low prices for public sector indus- trial goods as a means of fighting inflation and for social reasons. But assuming that they would rise as much as the inflated cost of the investment program (by 18.6 percent) they would rise to SL 23.4 billion. The surpluses of budgets would certainly not rise much, nor would non-inflationary financing. The calculation, under these very favorable circumstances, would end with a small deficit. The lesson of this calculation is that it is imperative to start with a revision of the pricing system now if by 1980 there are to be some results. The situation is even more grave. Even if cutting the overall size of the investment program seems to bring the required and domestically available resources into harmony, this is in fact not the case because domestic and foreign resources are not perfect substitutes, and hence a balance of pay- ments constraint may throw the whole program out of gear. 13.11 The government has not published, nor apparently made for internal purposes, a calculation of the import content of the whole investment program. For a few projects estimates have been obtained, which however seem so impos- sibly low in some cases that it is more likely that the figures represent foreign financing secured thus far rather than the import content proper. A perusal of Table 13.3 makes it quite clear that the third column does not give the total foreign exchange component, but only the anticipated foreign - 427 - financing of the exchange (import) component, the rest to come from domestic- ally controlled foreign exchange. The true foreign exchange content of the industrial package (the industrial and perhaps also the transport projects on the list) is likely to be closer to 50 percent. Even if it were lower--say 33 percent to 40 percent of total cost--the ongoing projects alone would require foreign exchange financing equivalent to from SL 7.8 billion to SL 11.2 bil- lion LI. Table 13.3: TOTAL COST AND PROJECTED FOREIGN FINANCING FOR SOME MAJOR PROJECTS IN THE FOURTH PLAN, SYRIA, 1976-80 (Millions of Syrian Pounds in 1975 Prices) /a Estimated Costs FDreign Exchange Total during 1976-80 Cost as Project Foreign Percent of Project Cost Total Cost Exchange Cost Total Cost Tartous Port 485 327.350 50.950 15.6 Lattakia Port Expansion /b 362 357.000 59.200 16.6 Railway Akari-Damascus /b 675 299.000 50.000 16.7 Damascus Railway /b ) 251.760 73.000 29.0 Highway II 530 444.200 38.500 8.7 Hama Tire Factory 450 379.710 334.000 88.0 Hama-Aleppo-Damascus Cement /b 495 217.487 100.000 46.0 Sheikh Said Cement 425 405.000 211.000 52.1 Total 3,422 2,681.507 916.650 32.3 /a In 1975 one Syrian Pound was equivalent to US$0.270. lb Project started before 1976. Source: State Planning Commission, Fourth Five Year Plan (1976-80)., (in Arabic). 13.12 Now, 53.6 percent of all imports in 1975 were for intermediate consumption, that is, for use by industry or other activities to keep the existing plant going. In fact, Table SA 3D.5 on imports shows that this percentage was higher than 54 percent in all years since 1965 except in 1973. Assuming this percentage to hold for the future, another SL 15.3 billion in foreign exchange would be needed for imports of inputs to maintain production 1/ The foreign exchange requirement has been calculated as follows: for on- going projects valued at 1975 prices (as in Table 13.1) SL 23.5 billion times 33 percent equals SL 7.8 billion; times 40 percent equals SL 9.4 billion. For ongoing projects inflated at 6 percent a year (as in Table 13.2) SL 27.9 billion times 33 percent equals SL 9.2 billion; times 40 percent equals SL 11.2 billion. - 428 - in existing capacities which were underutilized and whose fuller utilization is a major Plan goal. 1/ Imports for final consumption in 1975 were at an all time low of 17.4 percent--in all other years since 1965 they were above 20 percent. Assuming arbitrarily that good harvests and new import controls reduce the percentage to 15 percent, we would still need SL 4.9 billion. This means that these three categories of imports would require at a minimum SL 28 billion out of SL 30.9 billion export earnings, and might require SL 29.6 billion, leaving a minimum for debt service, and import payments for services. Clearly this rough but quite realistic calculation suggests not only that these balance of payments repercussions be considered in future planning, but also, that in the short run there is a serious conflict between expanding capacity and expanding the utilization of existing capacity. 13.13 The calculation suggests furthermore that it will not be possible to maintain trade liberalization as before and that it will be necessary to reduce imports somehow. But this in turn has repercussions on the financing of the Plan; the proposed surpluses of administrative units of SL 3.8 billion consists actually of three major items: (i) Municipalities (SL 1.0 billion), "Popular Works" (SL 0.2 billion), and Educational Establishments (SL 0.3 bil- lion); (ii) surplus of the customs administration (SL 2.3 billion) and (iii) construction taxes and fees (SL 0.5 billion). Thus 2/3 of these receipts are expected to come from the customs administration--whose receipts depend largely on liberalized imports. On the other hand, a reduction in liberalization will also inevitably affect the surpluses of public enterprises, as their production must suffer if, when, and to the extent that imports of intermediate goods or raw materials are curtailed. 13.14 Thus it becomes clear that even the aggregate balance of resource requirements suggested in Table 13.1 as the result of limiting the investment program to ongoing projects (and allowing for further slippage of 10 percent and further cuts of SL 1 billion or another 4 percent) is still not feasible in the short run, because of a balance of payments constraint that is imme- diately translated into a further domestic resource constraint. 13.15 The short-term reactions of the Syrian Government were all inevit- able, but provide only a brief breathing space; it is necessary immediately to start selecting projects on the basis of their prospective net returns, as the final process will take time. It is essential to cut inessential spending. It is essential to "rationalize the economy", a phrase that one meets with constantly in discussion. This phrase includes a variety of subtleties; one is to increase the utilization of existing capacities. It must be pointed out immediately that this, too, becomes an alternative to the creation of new capacity inasmuch as the same scarce foreign exchange may either buy the capital equipment to create new capacity or the intermediate goods needed to 1/ In other words, Syrian manufacturing industry was operating below capac- ity in 1965-75, so that imports of intermediate inputs for full utiliza- tion of existing capacity would presumably cost considerably more than SL 15.3 billion in foreign exchange. - 429 - run the existing capacity. It also becomes urgent, therefore, to make the necessary basic calculation as to whether existing capacity should indeed be fully utilized; the example of assembly of television sets suggests that this may or may not be so. 13.16 A second method is to "obtain resources from whatever sources". This too is sensible, but only within limits. It is sensible to go even to expensive contractor finance to execute a good project which could other- wise not be executed for temporary lack of funds, that is, until a new price policy can be instituted. But surely it is not sensible to go in for contrac- tor finance to bring, say, sugar mills which will not have the beets to keep them busy. 13.17 A third method that has been mentioned is to improve management. However, most of the measures taken under this heading will take time, as new personnel need to be trained and new rules of management, greater decentraliza- tion of decision making, greater freedom from ad hoc outside interference need to be organized. The possibility of linking performance to incentives has been mentioned. 13.18 There is, however, an alternative and relatively immediate way of dealing with this problem: to give the private sector more room to maneuver. in a recent speech, the Prime Minister reiterated the basic goal of pirevious plans of "strengthening and developing the base of socialism in order to enhance the role of the public sector as the -leading sector" but nevertheless specifically criticized the public industrial sector for harboring concealed unemployment and for "an increase in its administrative and non-productive costs and a weakening of the technical standard of its framework" and proceeds to suggest among the remedies: "to encourage the private sector in the industrial field and to find tax and customs facilities and incentives for this sector to show interest in production and take part in it, to free itself from the mentality of speculation and deals; to seek foreign markets for its industries and make use of their marketing. Furthermore, to assist the private sector in importing its requirements for industry such as machines, tools, raw materials and semi-processed materials." 1/ 13.19 The Prime Minister has been quoted at length to suggest that although the private industrial sector is to be aided, this commitment is somewhat less than wholehearted, and indeed in other sections of the Prime Minister's speech there are comments on "increasing the public sector's share in trade," for example. Nevertheless, in the light of recent government pronouncemients, the 1/ From a Ministerial statement delivered by Major-General Abdul Rahman Khlefawy before the People's Assembly in October, 1976. - 430 - furthering of the private sector must be interpreted as more than lip-service; but it must be understood that it does not imply a reversal of the commitment to a socialist economy (although the relevant precise meaning of "socialism" continues to be the object of definition, by evolving practices). 13.20 Table SA 5B.6 cited earlier gave intended and realized public and private investment in 1970-75 by sector of activity. For the total plan period 1971-1975, the investment targets were met. But the public sector met only 75 percent of its target whereas private sector investment was 320 percent of the indicative "target" set for it in the Third Plan. In manufac- turing, the overall investment target was even slightly exceeded (101 percent), but while the public sector met only 62 percent of target, the private sector met 763 percent. Private investment in manufacturing industry was expected to be equivalent to only 6 percent of public investment, in fact it was almost 3/4 as big (73 percent). 13.21 The relation of exports to production is even more startling. Total exports in 1976 were SL 4,141 million, of which SL 2,629 million consisted of petroleum and phosphates, wholly produced by public enterprises. Another SL 920 million was estimated to consist of agricultural products, all privately produced, though mostly exported through a public organization. Total manufac- turing exports were estimated at SL 592 million, only SL 177 million (30 per- cent) of which was manufactured in the public sector. In 1976 the origin of manufactured exports by very broad industrial classification categories was estimated by the State Planning Commission to be as follows (in millions of Syrian pounds): Public Private Manufacturing Manufacturing Processed foodstuffs 35.8 85.0 Textiles, clothing and footwear 6.0 15.0 Engineering products (metal manu- factures, machinery and equipment) 27.6 104.0 Total 69.4 204.0 13.22 Clearly, increased reliance on the private sector would have fairly quick results leading to an easing of the balance of payments constraint, and allowing time for the necessary reorganization of the public sector, including a reconsideration of price policy. It is probably this contribution that the government may have in mind rather than any radical reversal in its economic philosophy. 13.23 There is a final measure which technically could be introduced quickly though there may be substantial political obstacles. At present the budget is burdened by large subsidies to consumers for bread and sugar and a few other "essential" commodities. As the analysis in Chapter 6 suggests, these subsidies are given in a highly intelligent manner that does not lead to - 431 - further distortions in the allocation of the factors of production. However, the subsidies and rations are overly generous in several senses, they apply to rich and poor alike; sugar rations are said to be so generous that recipients sell part of their ration at a price higher than the subsidized price but lower than "free" prices. And they imply a subsidization also of Syria's affluent neighbors since there is little to prevent them from buying flour, say, in Syria. LONGER-TERM ADJUSTMENT AND POLICY NEEDS 13.24 Longer term adjustments are essential. It should be clearly under- stood what is meant by this term. There are (at least) two aspects involved. One is that it takes time to work out in detail new policies on prices or wages, for example, and to get everyone on the political level to agree to the final proposals. Thus the Plan refers to the need to link wages to productivity, but at the same time it is desired that there be some connection between wages and the cost of living, and that there be the same pay for the same job. There are enough potential conflicts in these (in themselvres unexceptionable) propositions to keep a wages and salary commission busy for some time. 13.25 Second, most measures which must be taken immediately nevertheless show their effect only over time. Educational or population policies are out- standing examples, but all investments produce outputs only after various lags. It is for these reasons that a long-term perspective is required. There is no perspective plan in Syria, and there is not really any point in spending scarce resources on the formulation of such a plan. There is every reason, however, to be conscious of the fact that decisions must be taken immediately which have delayed effects and that the long run is a series of short runs. 13.26 We start with a brief population projection--made because of the total and dangerous absence of a population policy. The census population of 1970 was 6,304,685, in 1960, 4,565,121, a compound rate of growth of almost 3.3 percent. The estimated population in 1976 was 7.655 million, another increase of 3.3 percent p.a. compound. At the same time, the population of Syrian nationals has increased between 1960 and 1970 by 46 percent (or about 3.9 percent p.a. compound) and between 1970 and 1974 (the last year for which there is an estimate) by another 19 percent (or 4.4 percent p.a. compound). Thus the national increase was above 4 percent and the influx of refugees must have been more than offset by emigration. If present trends continue, and the population increases by 3.3 percent compound (on the basis of the - 432 - 1976 population) we would get by 1980, 8.7 million, by 1990 12.1 million, and by 2000, 16.7 million.l/ 13.27 Such unchecked population growth would put the Syrian economy under insurmountable strains. To take just one example: while unemployment, open or disguised, is considered an evil to be eliminated, at the same time labor shortages are deplored. The inconsistency of the two statements does not seem to bother anyone. In part, the simultaneous existence of unemployment and labor shortages in different sectors or geographic areas is a matter of wage policy and information. But surely some part--many economists would say a large part--of the problem is that the absorption of labor also depends on the availability of investment funds, of savings. Labor could be attracted to the Euphrates basin easily enough if there were enough funds to pay high wages and provide an infrastructure of housing, electricity, schools, and stores to compete with the bright lights of Damascus and Aleppo. These funds are not forthcoming, and a rapid increase in population would absorb addi- tional production just to keep the population going at the old levels of living without allowing investments to raise that standard of living. 13.28 There is moreover a substantial time lag between the birth of a new baby and the time when he becomes a producer who contributes more to society than he consumes, a time during which substantial investment in schooling and health has to be made, investment that begins to bear fruit only after a substantial lag, and that bears fruit not automatically but only if the new and trained manpower has the needed capital to work with. But this needed capital itself and the necessary transformation of the economy is slowed down precisely because to provide it also requires savings and capital in a period during which the rapid population increase absorbs these very funds. 13.29 There is no need to make a detailed population analysis here; i.e. the age structure of the population, the way in which streams of young people enter the labor market, etc. Enough has been said to point out that even if it were true that Syria could maintain 16 or 17 million people at a higher standard of living than at present, this is not quite relevant to the real problems that have to be solved in the next decades. What matters is the rapidity with which the population changes, and the rate at which the population change preempts the economic resources needed to transform the economy. There can be no doubt that a less rapid population increase is needed to give that transformation a chance. There is also no doubt that a population policy has to be instituted now if it is to have an effect by the year 2000. Although there is still land available into which an increased population could spread, and although substantial investments are being made to make that land more productive, there is a danger that by the time the availability of land becomes noticeably scarcer the economy will not have 1/ These figures (though higher) are not significantly different from the UN high variant projections; see Chapter 4, Appendix 4A. - 433 - been sufficiently transformed to deal with further population increases. Surely Syria would not like to contemplate an Egyptian situation of a rapidly increasing population, no further availability of land and insufficient alternatives for the increasing population. Yet that is quite a realistic possibility. Societies do tend to develop defense mechanisms to unhealthy developments, but the experience of Egypt suggests that they might also fail to do so. 13.30 A population policy is an important enabling policy. What is needed is a policy that will transform available resources productively so that more resources are created. 1/ The Government has expressed the desire to increase per capita income as well as to improve the income distribution (aboul: which very little is known). We shall make an estimate below of possible develop- ments over the next five years or so. Here a number of comments must be made on economic policies that have a chance to work in the desired direction. 13.31 First, there is no alternative to better project preparation and selection. Increased productivity (a plan target), like increased production, requires many things but surely it requires a careful selection of projects on economic grounds rather than on purely technological or political grounds. The inputs and outputs must be valued as realistically as is feasible in order to decide on production methods and indeed on whether a project is worth while at all. A Manual on Project Preparation is again being made obligatory in the Ministries submitting projects. 13.32 Second, insistence on this kind of economic profitability has no ideological content and is fully consistent with the government's insistence on "Arab" socialism. If socialism means anything, it has been suggested, it means that there should be a more even income distribution and no incomes other than labor incomes. This must not, however, be interpreted juridically but economically. A public factory that employs too many people unproduc- tively and makes losses or insufficient profits which in turn require public subsidies, does not pay "wages" to its workers but economic rents--the most objectionable source of income from a socialist standpoint. Inefficient public enterprises requiring subsidies directly, or indirectly by not being able to make their expected contribution to the budget, are indeed redistribu- tion devices, but they redistribute income in a particularly inefficient and unjust way, creating a relatively small class of relatively well paid people, who economically speaking are rentiers to boot. 13.33 Third, a quick thought should convince one that the true zhoice can- not be one between employment or growth, or growth versus better income dis- tribution. Such choices are characteristic only for optimal situations. As long as the economy is as far removed from the optimum as the Syrian economy undoubtedly is, it should be possible to speed up growth, increase employment and improve the income distribution at the same time. It all depends on the skill with which economic policies are pursued. 13.34 Fourth, a long term view does not necessarily require thei making of a perspective plan with largely fictitious figures, sometimes not even internally consistent, of a rosy future in the year 2000. This is, of course,, a safe I Chapter 4, paragraph 4.09 describes the initiatives taken by the Government in the area of population policy. - 434 - enterprise since none will be really checking up in 2000 how things came out. A long term view does require attention to productivity and the budget now. 13.35 To set that point forth in more detail now, consider the nature of a socialist economy--the facts are the same for any other though the institu- tional manifestations are different. The government and the Party have repeatedly stated that the public sector has to be developed to lead the private sector in production, to lead in the transformation of the economy. The financing requires resources which are to be generated by the public sector and by taxation of the public as well as the private sector. Ideally, the economy works so that consumers pay a price that covers cost plus a pro- fit. The profit is returned to the budget, which in turn endows the enter- prises with investment funds. The enterprises themselves are responsible for financing their current operations, profits being the difference between their income and their cost. How depreciation is handled is to some extent the free choice of the government. It is as logical to require a public firm to hand the government funds to be used for maintaining the plant and let the planners, say, decide whether in fact to maintain the particular plant or reinvest elsewhere in the economy more economically, as it is to require the plant to look after its maintenance and hand over only the profits proper. It is not logical in any case not to require a plant to earn its depreciation. Yet, this is the procedure followed this far. The policy of any decision must be either to see that an investment does in fact increase productive and tax- able capacity; or that in fact it leads to proper direct contribution to the budget. 13.36 This point is made under the assumption--which corresponds to the Plan projections--that the major domestic source for investment finance is the contribution of economic enterprises to the budget. But the point is more general and applicable to different political and institutional environments. The dynamics and long-term aspects of investments and of a continuously grow- ing economy require that savings be increased as a result of the investments. In the literature on development economics it sometimes appears as if this were a direct consequence of the technology employed; the more capital-intensive the technology used the higher the savings. But this is only true if the investment is economically profitable. We are back at the crucial role of cost accounting and proper cost-benefit analysis and careful project prepara- tion. 13.37 A very rough calculation can be made of the returns on public investments in manufacturing in the past five years (making due allowance for the enormous shortcomings of our calculations). Total public investment 1971- 1976 in current prices in the manufacturing sectors was SL 1, 574 billion; the estimated (planned) contribution of manufacturing industries alone in 1976 was SL 97 million to the "Budget" (and SL 176 million for the "Budget" and "Liquidity"): 1/ 1/ "Liquidity" can be defined as the share of profits retained by the enterprises. - 433 Table 13.4: EXPECTED CONTRIBUTIONS OF PUBLIC MANUFACTURING ENTERPRLISES TO THE BUDGET, SYRIA, 1976 (Millions of Syrian Pounds) Branch of Manufacturing Budget and Liquidity Budget Alone Food industries 22,884 15,6 Chemicals and Engineering 79,741 54,378 Weaving 46,550 17,335 Cement 26,254 9,816 Pharmaceutical 0,334 - Total 175,763 97,158 Gross investment, 1971-76 1,574,000 1,574,000 Return on investment 11 percent 7.2 percent Source: Ministry of Finance. This rough calculation shows that in 1976, the government expected an 11 per- cent return on the total capital invested during the preceding five years. For several reasons--some of them already mentioned--the calculation. over- states even what the Government expects; the returns to the budget are all cash flows, after having neglected full maintenance. It is unlikely that after true maintenance, the return on capital could be much more than 5 per- cent. 1/ 13.38 The actual contribution of industrial, power and fuel, transporta- tion and construction enterprises to the budget in 1976 is estimated1 at SL 2,640 million (Table SA 5A.4); compared to an expected contribution of SL 2,5479 million. The necessary detail to breakdown the overall figure of actual receipts is not available. It seems however, as if the 1976 plan figure were more or less realistic. It still remains true that the return on the economic investments was very low. 1/ This corresponds in order of magnitude to the calculation in Volume 3 Annex 3 (The Public Manufacturing Sector) where return on fixed capital of General Organizations is 5.8 percent for 1977, when the abnormal projects of the Arab Company for Electronic Industries are excluded, as well as the losses of the Sugar Organization. However, there are, as the Annex points out, a number of reasons why this figure is to be treated with caution: there is no uniformity of accounting procedures. Much more important from the present standpoint is that there are "various direct and hidden subsidies, such as those involved in the provision of some inputs to the sector at subsidized prices, and also the sale of products at subsidized prices" which involve the budget directly and indirectly as well as incidentally suggesting (though not proving) an overstatement of the value added attributed to manufacturing industry in the national accounts. It is also pointed out that depreciation is calculated at original rather than replacement cost, and that: de facto therc are no profits that are being transferred to the budget:. - 436 - 13.39 Before continuing with the issue of price policy, the discussion should have made clear that public investment in manufacturing industries cannot have contributed to employment creation or to modification of infla- tionary trends or to better income distribution--all worthy aims of economic policy--precisely because they did not pay off adequately. The funds neces- sary to keep an industry going compete directly with funds for investment which also create employment. The heavy investments have not led to an increase in productivity (Volume 3, Annex 3). This implies that any increase in national per capita income must have come from other sectors, and that it would have been bigger if industrial investments had also increased output per worker. Hidden or open subsidies have required budgetary funds which compete directly with funds for current operations and for savings. The legitimacy of wishing to control inflation without hurting the poor is not denied nor the desire to redistribute income in their favor, but neither is effectively achieved by inefficient industries. While a case can be made for the losses of the General Organization for Sugar, it is difficult to see just what social or other purpose is served by the assembly of television sets which is totally exempt from all taxes while being allowed to keep the proceeds of the luxury tax imposed on the sets. 13.40 The number of people employed by the public manufacturing sector (except sugar) increased by 10,689 from 1970 through 1975. The total amount of investment in the sector in the years 1970 through 1974 (excluding sugar) was SL 256,136 million and through 1975, SL 453,899 million. This, on a rough calculation and assuming a one year lag, implies that it cost SL 23,963 to create a new job (or $6,144 at the official exchange rate of 3.9 SL/$) not very excessive but not cheap either. 13.41 The remedies which the government is already exploring include an improvement in management. Good people exist, but they are not always used properly, nor are they allowed to manage. Workers acquire de facto tenure. Prices are de facto prescribed and projects in the past have been bought from foreign contractors involving whatever technology the contractors suggested. This does not leave much scope to the manager. 13.42 Project preparation is to be improved. However, in the past it was not possible to reject poor projects if they were proposed by a powerful source. It is now suggested that a new Development Financing Fund handle all requests for funds by those forwarding projects, and that this Fund be fully independent. 1/ Projects are to be coordinated. The Government is aware that no sophisticated planning model is needed to make sure that requests for essentially the same project by different people are granted only once. We will return below to the changes needed in planning methods. 1/ The present Industrial Bank is the candidate for this task. However, Government decision has been delayed, possibly due to difficulties in determining the exact role of the Public Debt Fund (Ministry of Finance) in the new set-up. - 437 - 13.43 It is essential to realize that the whcie pricing structure has to be changed. The problem can be approached on tht theoretical, policy, and actual practical level. On the theoretical level the major point is that it is not possible to make decisions involving a great variety of things all measured in different units unless they are reduced to a common denominator. Money is such a denominator. In order for the prices to be interpreted, they must reflect the real scarcity of resources on the one hand and the preferences of consumers and/or planners and politicians on the other hand. Scarcities are objective facts with no ideological content. How far consumers are to be allowed to exercise their desires or how far they are to be superseded by planners and political decisions is a political question to which an economist qua economist has no answers. He must insist, however, that political choices are limited by actual potential availabilities of goods, or their relative scarcity. 13.44 The theoretical level becomes immediately practical in a small coun- try, such as Syria, with an ambitious development program; a country that can- not help being internationally integrated. Economists' calculations, allowing in cost-benefit analysis for distortion of prices through tariffs, subasidies, overvalued exchange rates and the like, simply try to draw attention to the reasons for actual policy failures. Syria has become conscious of the failure of import substitution policies; industries have been consumers of foreign resources but have been unable to earn enough exchange to pay for the imports. Hence the need for export promotion. 13.45 It would be more useful in the long run to point out that the use of world market prices to value projects is not due to belief in the superiority of world market prices. It is due to the recognition that an open economy has in international trade an additional method of transforming its factors into goods. So the problem of pricing becomes one of being able to value which of the possible methods of production is suitable for the needs of Syria. To deal with shortages of foreign exchange by exchange controls may in the short run be inevitable, but it is a sign of past wrong decisions, and it dloes not make additional foreign exchange available to the economy. 13.46 The actual political problem is still more complicated. Cost accounting in the public sector is not uniform, and leaves in general some- thing to be desired. Implementation of standard cost accounting has been postponed year by year. Apparently there is no accounting of past activities ready by the end of the year. It is therefore difficult to find out. just what the costs are in an individual firm and estimates for the future have no visible means of support. No comparison can readily be made between a firm's cost and the alternative through imports. There is no pressure on the firm to save resources and produce output. As the system works, it encourages ineffi- ciency. In effect, the public sector has access to the budget. Its cost-plus pricing is not based on forcing efficiency upon the firm, and its attempts to limit prices to a 14 percent mark-up in the public sector compared to 28 per- cent in the private sector gets things upside down: it is an incentive to raise cost as high as possible to raise the basis for profits. - 438 - 13.47 There is no real sense in imposing on the public sector prices and profits that are lower than those for the same or comparable products of the private sector. Unless the public sector can supply the particular commodity in sufficient quantities to supply the whole market, it simply leaves a particularly profitable corner to the private sector. To fulfill its role as a leading sector and as a control on the private sector, the public sector would at the same prices have to make bigger profits than the private sector, or at the same profits be able to charge lower prices. No evidence exists that such is the case. On the contrary, the private sector is internationally more competitive than the public sector. If a subsidy is to be given, it should be uniform throughout to allow a proper comparison and hence a proper base for decision making. 13.48 If particular income classes are to be helped it would be better to give them special entitlements than to give a subsidized price to everyone, rich or poor. The argument is simply that subsidization of the poor is quite consistent with proper resource allocation and an efficient public sector. CONSTRAINTS TO DEVELOPMENT 13.49 Before attempting a reasonable projection for the next five to ten years, it may be useful to review the obstacles which must be confronted in changing policies and making them more effective. There are constraints inherited from the past; constraints that are inherent in the situation in which Syria finds herself; constraints that could be changed by changing institutions; and, of course, unforeseeable and uncontrollable constraints. 13.50 The major inheritance of the past is the political decision, made a dozen years ago, to develop Syria as a socialist economy, though it is more accurate to describe the economy as a mixed one in which the private sector has an important function. The Government sector of production is not likely to be privatized; it is to be enlarged, and despite past limitations it is expected to "lead" the private sector. 13.51 Fortunately, most policy decisions about decentralizing, about the uses of price policy, about wage policy, and about balance of payments policy, are quite neutral as far as a choice between private and public production is concerned. However, there have been substantial investments which either have to be made more efficient, or which must be eliminated. Neither can be easy, since they necessarily have created their own vested interests. The Government is calling for elimination of "disguised" unemployment, which in the case of public firms means excess employment. It has called for rapid increases in productivity (output per man), but the difficulties that stand in the way of fulfilling these plan targets are undesirable. 13.52 Syria is a relatively small country, therefore necessarily open. Integration into a world economy is inescapable. Decisions must be made, - 439 - whether this is so desired or not, with an eye on the world market. It fol- lows that the balance of payments necessarily remains a constraint on what can be done and what should be done. "Import" substitution is recognized as a failure; export promotion is the watchword of the day. But both are slogans of dubious meaning: what is obviously needed is a policy of investments that pays at socially correct prices, as opposed to financially valid prices. This leads back to the earlier discussion of the necessity of sound project prepa- ration with a thorough if not necessarily very sophisticated cost-benefit analysis. But it raises problems of timing that will require political deci- sions: how rapidly to phase out explicit subsidies or implicit subsidies (such as the tax exemption for the TV assembly plant); or at what rate to force a dismissal of an excess labor force. In any case, a policy that does not consider the balance of payments constraint and that does not go beyond simple commodity-balance-sheet planning to the potential impact of that con- straint on the relevant prices and cost and on savings does not have much of a chance to succeed. 13.53 There are unforeseeable constraints. Capital flows cannot be fore- seen in any detail or be controlled by the government in any large measure. Syria might find more petroleum or some other natural resource. The Arab common market might develop in a more meaningful sense. (To consider as "domestic" goods eligible for free trade within the Arab common market only goods that have a value added of 40 percent or more eliminates virtually all industrial goods.) The oil-exporting Arab countries might commit themselves to finance a new well-thought-through Plan. There might be peace in the Middle East. The fact that the future is not completely foreseeable means that any policy has to allow for some safety valve. PROJECTIONS TO 1980 13.54 Given these constraints which should be in effect for the five years 1978-82 how can one reasonably project the future? As a basis for our projec- tions we use both data on developments of the recent past and estimates incor- porating future possibilities as judged by the Mission. In addition the revalued series of GDP by industrial origin in 1975 prices, presented earlier in this Chapter is used in order to allow better for the radical change in the structure of the economy arising from the more or less permanent change in the terms of trade between petroleum and other products (See Table SA 2I.3). 13.55 Table 13.5, presents the growth rates by activity for the 1970-75 period and our calculations for the 1976-80 period. As to the assumptions, the following comments should suffice. Agricultural output is projected at 3.5 percent. In the years 1970-1975 the rate was 6 percent but there were three very good crop years. The typical weather cycle suggets that at least two bad years will follow during the next five years. Easy expansion of production on new lands is no longer possible. Not all lands to be irrigated are newly irrigated acreages. For these reasons the lower figure has been suggested in Chapters 7 and 8. 13.56 The output of mining and quarrying in Table 13.5 is subst:antially identical with petroleum, although there are some phosphates, some asphalt, and the more common products of quarrying. No new petroleum finds have been - 440 - Table 13.5: GROSS DOMESTIC PRODUCT BY SECTOR OF ACTIVITY-PAST PERFORMANCE AND PROBABLE EVOLUTION IN FOURTH PLAN PERIOD, SYRIA, 1970-1980 (in constant 1963 or 1975 prices) /a Compound Growth Rate Probable Evolution in 1963 prices Conver- Gross Domestic Product/b (Percent a Year) sion At Factor Cost Past Factor (Million Syrian Pounds) Performance Assumed (1963 (at 1963 (at 1975 Activity Average Year Average to 1975 Prices) Prices) 1970-75 1976 1976-80 Prices) 1976 1980 1976 1980 Agriculture: 6.8 6.0 3.5 2.248 1643.3 1885.7 3694.1 4239.1 Industry: Mining, quarry- ing, petroleum 51.8 -5.0 1.0 7.243 422.9 440.1 3063.0 3187.4 Manufacturing 8.6 8.0 9.0 2.165 1221.8 1724.6 2645.2 3733.9 Electricity, gas, water 14.1 4.0 6.0 1.174 113.4 143.2 133.1 168.1 Construction 22.5 21.0 10.0 3.762 352.7 516.4 1326.9 1942.7 Total Industryld 15.4 6.8 7.0 (3.396) 2110.8 2824.3 7168.2 9032.1 Services: Production- related: /c Transport, communi- cations 12.7 7.0 6.0 1.283 1072.4 1353.8 1375.9 1737.0 Trade Finance, 2.1 17.0 7.0 3.384 865.8 1134.4 2929.9 3840.5 insurance 0.4 5.6 6.0 3.205 128.8 162.6 412.8 521.2 Subtotal/d (6.2) (11.0) (6.4) (2.283)(2067.0) (2651.3)(4718.6)(6098.7) Other: Housing rental 3.9 4.0 6.0 1.628 430.9 544.0 701.5 885.6 General Gov- ernment 2.2 7.0 7.0 3.204 838.2 1098.7 2685.6 3520.3 Other services 11.2 5.0 6.0 1.773 656.8 829.2 1164.5 1470.2 Subtotal/d (5.1) (5.6) (6.4) (2.363)(1925.9) (2471.9)(4551.6)(5876.1) Total Services/d 5.6 8.3 6.4 2.322 3992.9 5123.2 9270.2 11974.8 Total gross domestic product at factor cost/d 8.2 7.4 6.1 2.599 7746.9 9833.2 20132.5 25246.0 /a Data in 1963 prices are multiplied by conversion factors listed to obtain 1975 prices. lb Assumed growth rate 1976-1980 is ued to obtain 1980 GDP estimates. Tc See para 3.10. /d Growth rates derived after adding totals. Source: Table SA 2B.1 and World Bank estimates. - 441 - made. The old finds are exploited to the technical maximum and will decline slightly over the next few years. A growth of 1 percent p.a. for the sector seems reasonable, if a bit optimistic. 13.57 As for manufacturing, it is also unclear how the 1970-75 growth rate could be maintained in the face of balance of payments difficulties, though it is possible that the private sector will again surprise everyone by its outstanding performance. Our assumed construction increase of 10 percent for 1976-80 is substantial, but well below the 22 percent rate of 1970-75'. It is difficult to foresee a continuation of the construction boom in Damascus with its highly speculative component. For those service sectors thai: are associated with commodity production, growth rates are assumed that have some relation to the goods they are supposed to transport or turn over. Transport income is also sensitive to the transit flow of petroleum from Iraq. No assumption has been made on this point. The remaining sectors have been assumed to grow at the same rate as in 1976. 13.58 The estimate for overall growth in GDP for 1976-80 appears slightly faster in 1963 prices. This reflects the changed structure of the economy, or rather the changed weights due to the quadrupling of petroleum prices: measured in 1963 prices, manufacturing is about three times as important as mining, but measured in 1975 prices, it is only about nine-tenths of mining: growth of 6 percent between 1976 and 1980 is substantial, but it is only half of the Plan projection. TENTATIVE PROJECTIONS TO THE YEAR 2000 13.59 After 1980, with reforms of the price system, new incentives and more effective projects, it is conceivable that growth could accelerate again. Still, it is unlikely that the rates of growth envisaged in the Fourth Plan can be reached. The Plan itself assumes that GDP in 1975 prices will increase between 1975 and 1980 by SL 14,492 million, on the basis of an estimated SL 35,605 million investments between 1975 and 1979. The implied marginal ratio of capital to output is quite low at 2.46 to 1. The implication of our calcu- lations has been that GDP will increase between 1975 and 1980 (in 1975 prices) by SL 6,390.3 million on the basis of a gross investment of approximately 22 billion, implying a marginal ratio of capital to output of 3.44 to I., but still rather low. 13.60 Clearly, after 1980, there is an increasing chance that new policies might start to show results (but only if started now, not in 1980). Assuming that investments undertaken between 1970 and 1974 showed results wilth a one- year lag in 1975 (and investments between 1970 and 1975 correspondinigly in 1976), we get (in 1963 prices) an increase in GDP from 1970 to 1975 of SL 2,104.2 million, and from 1970 to 1976 of SL 2,635.9 million. Gross fixed investment from 1970 through 1974 was SL million 4,876.8 and from 1970 through 1975 SL 6,969.9 million, so that the marginal capital/output ratios would be - 442 - 2.32 and 2.64 respectively, figures too low to be believable even allowing for the fact that the real growth was in petroleum. 1/ 13.61 By the year 2000, with a 3.1 percent rate of growth of population, Syria would have 15,608 million inhabitants (assuming the official midyear projection for 1980 of 8,642 million Statistical Yearbook 1976, p. 107). Assuming 46 percent to be under 15 years of age (as in 1970, op. cit. p. 105) and another 3 percent over 65 years of age (ibid) would give a population of working age of, say, 50 percent or 7,804 million by 1980. Agricultural plans call for irrigation of previously idle lands and more intensive cultivation of already cultivated lands. The effective acreage would have to be doubled or more just to preserve the overall ratios of people to land. Obviously, this would not quite suffice to increase productivity, hence important investments and increased use of intermediate products would have to be prepared, as well as institutional changes that would allow a more intensive cultivation. This would absorb increasing investment funds, though not necessarily from the investment budget. It might also imply some movement of people from the agri- cultural sector into non-agricultural pursuits. 13.62 In fact, the implications of the rapid population increase and the necessity of raising agricultural productivity even more go in several direc- tions. One may be a decentralization of industrial production, which in fact is and has been a plan aim. The issue goes deeper than planning a distribu- tion of factories all over the map--a procedure which may rapidly become self defeating. It is necessary that these factories work without subsidization, i.e. that they are productive. If they are not, the subsidies necessarily compete with other investible funds, the most important of which may yet be the creation of social infrastructure. The reasoning involved is not diffi- cult to understand. Agriculture must be made more productive. This requires technical and social change as well as incentives. Good prices are only the first step to guarantee a higher income. The higher money income becomes a higher real income only if it can be spent. If farmers get no roads, no electricity or water, no movies or other entertainment, the only way in which the money income can be converted into something real is to move into the cities. Starting with a distribution network, some plants are bound to become economic--provided agriculture is productive, and provided new local plants are established. Clearly not every village can have a factory, though every village could have a good income, water and electricity and a good road connecting it with a producing center. 1/ Taking the official government data rather than the World Bank figures we get for total "accumulation" 1970-74 in constant 1963 prices SL 4,951 million, and for 1970-75, 7,084 million. The increase in GDP 1970-74 is 3,613.1 million and 1970/75, 4,361.4 million with implied capital/output ratios of 1.37 and 1.62, which simply cannot be. It would imply a fantastically profitable economy, no balance of payments troubles, nor any difficulties with domestic savings which we know does not correspond to actual experience. - 443 - Table 13.6: TENTATIVE PROJECTIONS OF FUTURE GROWTH RATE AND GROSS DOMESTIC PRODUCT BY SECTOR OF ECONOMIC ACTIVITY FOR SYRIA IN THE YEAR 2000 Gross Domestic Product Gross Domestic Product Variant 1 Variant 2 Projected Projected Growth Rate Year 2000 Growth Rate Year 2000 1975-2000 (Millions of 1975-2000 (MilLions of (Percent Syrian Pounds (Percent Syrian Pounds Sector of Activity a Year) at 1975 Prices) a Year) at 1975 Prices) Agriculture 5 11,802 5 11,802 Industry: Mining 1 4,132 1 4,132 Manufacturing 10 26,534 8 16,772 Construction 5 3,713 10 11,880 Utilities 10 1,387 10 1,387 Subtotal ... 35,766 ... 34,171 Services Production-related: Transport and communications 8 8,806 8 8,806 Trade 10 27,129 10 27,129 Finance (banking and insurance) 8 2,678 8 2,678 Subtotal ... 38,613 ... 38,613 Other: Rental on dwellings 5 2,284 5 2,284 General government 1 3,219 1 3,219 Other services 1 1,422 1 1,422 Subtotal ... 6,925 ... 6,925 Total gross domestic product 6.6 /a 93,106 6.55 /a 92,057 Gross domestic product at assumed 5 percent growth rate 65,160 65,160 ... means not applicable /a Implicit growth rate derived from year 2000 totals. Source: World Bank estimates. - 444 - 13.63 In order to make such a rosy future more than a dream, the economy would have to grow fast, and would have to transform a substantial portion of that growth into savings which in turn could be used to enlarge the productive capacity of the economy. This in turn requires a rapid increase in the tax- able base so that increases in government revenues come out of an increasing income and do not cut into increases of consumption. Hence it becomes neces- sary to make sure that Government expenditures on investments enlarge the taxable base, and that the price system is reorganized so that subsidies are limited to the target groups. It is impossible to subsidize everyone at the same time. The tolerable amount of subsidy increases with the productive capacity of the economy. 13.64 It is hardly possible to make more than a crude stab at the order of magnitude of investments and GNP involved (See Table 13.6). With a population of 15,608 million in 2000 compared to a resident population of 7,410 million in 1975, GDP would have to be SL 39,717 million in 1975 prices at constant per capita income, (or SL 15,196 million in 1963 prices), compared to SL 18,856 million and SL 7,215 million respectively in 1975. Assuming just a 2 percent per year increase in per capita income would raise the necessary 2000 income in 1975 prices to SL 65,160 (2 percent per year compounds to 64 percent in 25 years). Agricultural output would have to increase at least by 5 percent per year to allow for the increased per capita income of the increased population, or in 1975 prices to SL 11,802 million. It is unlikely that in the absence of further petroleum finds, mining and quarrying would increase more than 1 per- cent per year if that; say 1 percent per year. This would give in 2000 SL 4,132 million. On the other hand, one would expect manufacturing to increase by at least 9 percent per year, say 10 percent, and construction by at least 5 percent, (we make an alternative calculation of 5 percent for manufacturing and 10 percent for construction). This would give for manufacturing: 26,534 million at 10 percent and 16,772 million at 8 percent; for construction 3,713 at 5 percent and SL 11,880 billion at 10 percent. One would expect public utilities to grow at least at 10 percent per year to, say, SL 1,387 billion to allow for the planned rural improvement in the life style. 13.65 Transport and communications would have to grow at least 8 percent to keep up with the production of goods, to say, SL 8,806 million and trade would have to grow by at least 10 percent to allow for the better supplies in the countryside, to SL 27,129 million. Ownership of dwellings would have to grow at least by 5 percent per year to SL 2,284 million, and Finance by, say, 8 percent; to SL 2,678 million. The "calculated" projections already amount to much more than the SL 65,160 million which correspond to a growth rate of GDP of 5 percent per year. If we now let government and "other services" grow at only 1 percent per year we get SL 3,219 billion for government and SL 1,422 billion for other services. If we let transport, trade and finance increase at a compound rate of 6.8 percent a year to correspond to the average assumed for total industry we would get SL 35,804 million for 2000. And for total GDP SL 88,013 billion or SL 86,964 billion implying a compound annual growth rate of 6.6 percent which in turn implies a growth in per capita income of about 3.5 percent rather than 2 percent a year. - 445 - 13.66 How realistic are some of the growth rates projected in Table 13.6. The compound annual growth rate in GDP at 1963 factor cost was as follows (Table SA 2B.1): 6.74 percent 1960-75; 5.77 percent 1963-75; 7.14 percent 1970-75; and 7.4 percent in 1976. But the good performance between 1970 and 1975 was due both to a growth rate of agriculture which approached the average and to huga increases in mining, construction, and transport and communica- tions. The growth rate in 1976 was entirely due to a combination of good growth (near the average) in agriculture and industry, and appreciable growth in trade and construction. Mining actually declined by 5 percent. 13.67 This suggests that (as poor harvest years are bound to follow the series of good years), a longer term growth rate of 5 percent a year for agriculture is possible with the right policies, but hard to achieve; that mining may very well either not increase at all or decrease; and that it will be difficult to make industry grow at 8 percent per annum unless substan- tial changes in policy are undertaken. The estimated growth rates for con- struction and utilities seem feasible, whereas the low growth rate for government seems unrealistic. 13.68 If the projections from Table 13.6 are adjusted to accord with the foregoing conclusions, we come up with a third variant set of estimates for the annual rate of growth over the twenty-five years 1975-2000 and for value added (gross domestic product) by sector of economic activity in the year 2000, as follows: Projected Growth Rate Year 2000 1975-2000 (Millions of (Percent Syrian Pounds Sector of Economic Activity a Year) at 1975 Prices) Agriculture 5 11,802 Industry: Mining no growth 3,223 Manufacturing 8 16,772 Construction 10 11,880 Utilities 10 1,387 Subtotal not applicable 33,262 Transport, trade, finance 8 28,563 General government 7 13,625 Ownership of dwellings, other services 5 14,157 Total gross domestic product 6.96 101,407 In variant 3 the implicit annual growth rate in total GDP (derived from the sum of our projections for the individual sectors of activity) is somewhat higher than in variants 1 or 2 in Table 13.6. This is due entirely to the more realistic estimate of practically inevitable growth in general govern- ment. Our projections, whether based upon past performance (the 1970-76 - 446 - growth rate) or on what seems possible for each sector of activity, suggest the possibility that the economy will continue to perform well. However, there are likely to be continuing constraints in the availability of financial resources for investment, both in domestic savings and in foreign exchange (balance of payments) resources. 13.69 Table 13A.1 (see Appendix 13.A to this Chapter) locates the origin of these financial constraints in the years from 1963 through 1976. It shows that for the years 1972-76 gross domestic investment rose to between 20 per- cent and 30 percent of GDP at current market prices (the exception being 1973). The growth in gross domestic savings, however, was not commensurate; except in 1972, they remained at less than 20 percent of GDP. In the same period the deficit in merchandise trade on the balance of payments became substantial despite mounting petroleum earnings. As a result of these devel- opments, the portion of gross domestic investment that had to be financed from abroad rose rapidly from 5.5 percent in 1963 (when development planning began) and 1.6 percent in 1965, to well above 20 percent in 1966-71 and 1973-75; for 1976 it was estimated at 65.7 percent. 13.70 Table SA 5B.9 offers a clue to the reason for the unsatisfactory rate of growth in domestic savings, particularly public savings. Expressed in percent of GDP at current market prices for the period 1966 through 1976, tax revenue remained curiously static; current budget expenditure for purposes other than defense was held remarkably steady; but current expenditure for defense and capital expenditure for development increased--the former absorb- ing potential budgetary savings at a rate that was perhaps somewhat out of control, and the latter accounting for the increasing need to finance develop- ment from abroad. 13.71 The picture might be basically favorable, save for an important fact: the increase (in absolute value) that did take place, for example, in tax revenue during the period derived not from an increase in the tax base (taxable capacity) due to past development policies and investments, but from less lasting causes. A large portion of tax revenue in the period came from the increasing yield of import duties, which itself depended on the ability to finance the rising imports. Another important source was public enterprise surpluses, the bulk of which came from the increase in the export price of petroleum--a one-shot increase of an essentially fortuitous nature. Already in 1976 with a substantial drop in unrequited transfer receipts, and despite an increase in the production and export of petroleum, the GDS rate had declined to 10 percent of GDP. Thus it is clear that petroleum and foreign financing, particularly transfers, not development itself, made possible the increase in savings. 13.72 With immediate corrective action beginning in 1977/78, the World Bank estimates for a six percent per annum GDP growth to 1985 in Scenerio II (see Table 12.8) suggest that the foreign exchange gap can decline gradually relative to GDP. However, implicit in this projection is the assumption that the still relatively large gaps would be filled somehow, which is not at all self-evident. - 447 - 13.73 Otherwise according to the analysis in paras. 12.53 to 12.58 in Scenario I of Table 12.8 the debt burden--not surprisingly--would become intolerable. The point of bringing these figures to 1985 is twofold: first, there is no way of getting to the year 2000 without getting through the year 1984. Second, the implications of the figures are that changes in policies must be undertaken now if the economy is to grow at a satisfactory rate, It cannot simply be assumed that the projected savings and resource gaps w-ill somehow be filled. I turn now to the policy problems. POLICY PROBLEMS 13.74 The general outline of what has to be done is clear enough: imme- diately cut investment expenditures in as rational a manner as possible to a feasible level. Try to increase the effectiveness of investments so as to improve resource availability as fast as possible. Increase savings through the budget by adjusting subsidies to the level required for social purposes and by raising the contribution of economic enterprises to the budget. This requires a restructuring of prices to permit public economic enterprises to make an economic profit; but it also requires a more direct change in the incentive system of public enterprises to force upon them a somewhat greater effectiveness. Since increased savings require that someone consume less-- unless the whole increase can come out of increased production--it becomes essential also to rethink policy on wages and farm prices so as not to impose the brunt of the burden upon the poorest members of society. 13.75 All this is plain enough. The problem arises in the practical application and the speed with which changes can in fact be introduced, given political realities and the fact that the consequences of past mistakes cannot simply be wished away. Debts incurred for enterprises of dubious economic value, for example, must still be repaid; and changes in rations or in work norms are politically difficult to introduce. Project Preparation 13.76 It has been mentioned before that project preparation as a pre- condition for execution virtually ceased during the years of fiscal affluence after 1973, but that is now being reintroduced into the planning process. It has also been argued that the April 1977 plan revision cutting the volume of projects to be executed to ongoing projects will not in itself solve the basic problems but at best give a short breathing speech. The unanalyzed, unprepared projects remain unanalyzed; and it must be particularly difficult for the gov- ernment to have to cut out virtually all social projects. The present "solu- tion", unless followed up by a project-by-project economic analysis, therefore imposes unnecessary social cost without any assurance whatsoever that the sacrifices asked will lead to an adequate increase in output. 13.77 No great sophistication is necessary at the central planning level. But there should be a reasonable idea whether a project submitted to the decision-makers on planning is likely to have the market for its output claimed by its proponents; whether prices suggested for inputs and outputs bear some relation to reality or will require subsidies from the budget or - 448 - excessive protection; and--especially important--how the different projects relate to each other. It is hardly enough simply to add the projects. Planning implies time sequences: some projects, to make sense, must come before others. At present no coordination beyond addition takes place; but the reorganization of the SPC is a step towards reestablishing a more meaning- ful coordination. 13.78 Some cost-benefit analysis, however crude, is indispensable. With- out it no sensible choice is possible between competing projects. In the early days of Syrian planning (Chapter 3), East German advisors introduced commodity balance sheets. But such balances give information neither about whether it is sensible from the standpoint of efficient resource allocation to produce a commodity in the first place, nor about potential markets for excess production or financing of supplies to meet excess demand. For these reasons the superficial resemblances of commodity balances to linear program- ming or input-output models is misleading. 13.79 Thus the purpose of introducing more careful project preparation comprising some cost-benefit analysis and more systematic efforts to bring projects in relation to each other is to allow the government to make better choices on what to produce and how; on how to use its scarce resources; how to make sure that it will in the future have more resources available for alloca- tion to is political aims, whatever they may be. It is fashionable to play down growth as an aim of development by pointing to the many dimensions of the needs of society and the individual. It is good to keep this multiplicity in mind. It remains true, however, that the fulfillment of most non-economic ends requires real resources, that is, economic means, and that, therefore, the strictures against growth are at times somewhat misplaced. Increased productivity still is critical in low-income countries, and that requires substantially improved resource allocation. The purpose of cost-benefit analysis is only this: to aid in the process of improved resource allocation. Projects and the Budget 13.80 At present the budget is presented under two main divisions: the current and the capital (investment or development) budget. In a developing country such a separation is meaningful provided it is not forgotten that in fact the budget is a unitary budget, that is that in fact a pound spent any- where means a pound not spent somewhere else. In Syria, as in many other developing countries, this interrelationship between the two budgets is, if not broken, at least seriously weakened by two institutionally conditioned facts. One is that the development budget is the concern of the SPC, whereas the current budget is the responsibility of the Ministry of Finance. The other is that until the recent reorganization of the SPC, there was no one in the SPC whose business it was to consider the implications of the invest- ment plans for the recurrent budget. 13.81 The rationale of separating the two budgets can only be that in all developing countries, the budget is expected to supply the major part of national savings. It is often argued--and it is often true--that in the absence of a capital market, not only are private savings small but it is - 449 - institutionally difficult to collect such private savings as there are and to channel them into growth-producing investments. We need not go into the ques- tion of whether this is really so in Syria; we have given evidence befDre of the private sector vastly overfulfilling its targets for investment (aad hence by implication also its savings targets) while the public sector was falling seriously short. Even if this is true it also remains true that there are large public investments which should be financed by public savings, the latter being almost by definition the surplus of the current budget. In developed countries, the Government undertakes substantial investments but it is not expected to formulate its budgetary policy with the provision of savings in mind. 13.82 The separation of responsibility for the preparation of the two parts of the budget and the absence until very recently of a planning unit which paid attention to the savings implications of the public investment program and public policies (particularly with respect to prices, subsidies, and wages) suggests a serious gap in the planning process. It is in Eact the budget, not the plan, which ultimately determines what is being done and can be done. It is dangerous to treat the budget separately from the plan. There is danger not merely that tax and expenditure policy may be formulated with only the needs of the moment in mind, but that it may be made without rela- tion to the economic functions which the government arrogates to itself in a socialist economy (but by no means only there!). The danger is that the rela- tion between receipts and expenditures may be forgotten, or at least insuffi- ciently considered. Yet it is consonant with principles of modern public finance 1/ that only a simultaneous consideration of receipts and expenditure can give a true picture of the effect of budgetary policy on income distribu- tion, for example, or--what is of more immediate concern--on growth. 13.83 It may be convenient to distinguish between those public expendi- tures that go for productive purposes and those that go for social purposes. In Syria, the former go in principle to enterprises that are expected to be profitable and that are expected to contribute these profits to the budget. Social expenditures are by definition expenditures which have no dir(ect effects on receipts (but may nevertheless, after frequently substantial lags, have powerful indirect effects; expenditures on health and education are of this kind, or expenditures to control the growth of population). There are current expenditures that are strongly growth inducing, often with only small lags (extension services come to mind). One characteristic of investments in economic enterprises is that their operating cost, including the maintenance of plant, is internalized in the operation of the plant, while social expend- iture on, say, schools or hospitals are not expected to pay for themselves by charging fees to their "tcustomers"f. 13.84 In the classic or "ideal" model of a socialist economy--and Syria is in this respect rather far removed from the classic model--the government 1/ See for example R.A. Musgrave, The Theory of Public Finance, New York, McGraw Hill Book Company, Inc. (1959). - 450 - sets the savings target on one hand and on the other hand it invests these savings. This is done for the public enterprises by endowing them with investment funds and with initial operating funds from the budget. Consump- tion is regulated and the savings target achieved by a wage policy that limits total of money incomes to the equivalent of expected planned production of consumer goods, and uses indirect taxes to vary prices so as to equilibrate demand and supply. The public enterprise sector uses its initial budgetary allocation to pay wages and buy raw materials and intermediate goods. It is expected to get the money back by selling the goods at the (planned) profit. If something goes wrong, it shows immediately in the fact that the return flow of money to the enterprise is insufficient to continue operations and in a socialist "ideal type" of economy the banking system finds out immediately through the short-term financing needs of the enterprise, and the signal is given to the economy to look into the matter. This is in fact also precisely how the process would work in a large capitalist enterprise, once it got its capital. In a socialist economy an enterprise that makes "excess" profits is not automatically allowed to expand its productive capacity but is expected to return the "excess" to the budget. The decision whether to expand the profit- able enterprise or whether to use the funds elsewhere is a decision which is ultimately made by the government, which has presumably established a plan organization for that purpose. 13.85 This "ideally-typical" process is not so different from that of a large capitalist enterprise except in the degree of centralization and in the criteria according to which an economic enterprise will invest its profits in the expansion of the identical production that has created the profit, or in another line that promises better profits. From the economic standpoint, pro- fit is simply the sign that as the result of one's allocation of resources, one has received more resources than were originally used. Who gets these profits and how they are re-used is in principle a separate question. 13.86 When the process is applied to the Syrian situation, a certain num- ber of conclusions follow. We mentioned in the preceding section the most important: the necessity for reasonably careful project preparation and selection. It remains to be added that it is essential to have a reasonably clear idea when and for how long the project will require budgetary funds and when it will start contributing to domestic (budgetary) savings. It becomes important to ensure that the projected enterprise will be able to finance its own maintenance and produce the required goods at the projected price and with the projected profit. 13.87 But this point immediately leads to further considerations with important budgetary implications which should be made explicit in the planning process and should be put into a general planning framework. The first is that projects in the social sector or other non-economic activities will, almost by definition, require increasing current resources from the budget long after the capital expenditures are made. Long after a school has been constructed teachers must be paid and it will take years before the school will reach its capacity so that current expenditures on the school will stop increasing. The implication is twofold: the current budget projections will be the most important check on social "capital" expenditures; and the margin - 451 - within which the government is free to expand its social functions will increase the more productively the economic enterprises operate. That is, the greater the surpluses that can be contributed by the economic enterprises to the budget. 13.88 In a sense the planning method suggested by this use of the budget implies that at the margin the expenditures on economic and social investments yield the same return. Adherence to strict economic cost-benefit principles in the planning of economic enterprises ensures that fiscal resources avail- able for all purposes (further growth, income redistribution, subsidies, and social expenditures) will grow adequately. It also ensures that enough is spent for social purposes and not too much for economic purposes. Adherence to the budgetary limitations ensures that not too much is spent on social expenditures and the like, and that such expenditures--which represent the ultimate aims of development--do not interfere with an adequate amount of economic expenditures which are after all expected to produce the means of fulfilling the ultimate social desires. Price Policy, Wage Policy, and the Budget 13.89 Unfortunately we cannot leave matters there. It becomes necessary to look more carefully into why economic enterprises have, in the past, failed to contribute adequately to the budget. The first reason, as has been pointed out several times before, is that their preparation has not taken economic con- siderations into account. And this remains true particularly for the projects included in the Fourth Plan 1976-1980. Many projects have no chance of paying off by contributing more resources to the economy than they have required. 13.90 There is, however, a second reason why enterprise earnings are deficient. The government is trying to use public enterprises for a variety of possibly contradictory purposes. It is trying to set a "yardstick" to the private sector by producing more cheaply. But this is meaningfully achieved only if public production is at lower cost. Such is not the case. It is trying to keep prices of goods produced by public enterprises low for social reasons--insofar as these are considered "vital" goods like some textiles-- and as a means of inflation control. But either purpose requires efficient production. 13.91 Thus it is clear that if prices of textiles, for example, are kept low in the face of the foregoing shortcomings of public production, the earn- ings of the public enterprises involved must suffer. This implies, other things being equal, that the enterprises can contribute less to the budget, or may not be able to maintain their productive plant in the long rln. In the first case budgetary receipts are eroded, in the second case budgetary expenditure is affected because the budget must make available not only investment funds but also reinvestment funds. Either way, budgetary savings are diminished, and this in turn leads to undesirable repercussions; the government may resort to inflationary borrowing, in which case the supposedly inflation-fighting price policy is negated. Or it may result in non-infla- tionary borrowings which, in the absence of a capital market and of adequate - 452 - private savings, means foreign borrowing. But this inevitably leads to balance of payments problems because the "investments" so financed have not led to increased production (if they had done so there would have been no need to borrow in the first place) and hence have not created adequate resources to meet increased debt service. Or the government may cut its expenditures to suit its means. 13.92 The economic and social effects of the last choice depend upon a number of circumstances. If the project whose price has been kept low would have been economically viable at a realistic price the low price represents a subsidy to consumers which has cut into savings and is therefore offset by reduced government expenditures elsewhere. If these reductions are made in non-viable enterprises the growth of the economy may even benefit. If the cuts come from other social expenditures the government has implicitly decided to affect different target groups. It is good to remember however, that an analyst's rationalization of what happened does not in fact justify what was done, since the government, if it hasn't been aware of the implicit effects of its decisions might well have preferred a different decision in the first place. If the enterprise whose price is kept low would not have been viable in the first place at economic prices, the effect of the low price is not limited to subsidies for consumers. It actually makes the lack of viability worse, and induces the additional flow of resources in a direction which is economically not desirable. All this inevitably comes out in the budget. 13.93 The opposite can also occur: the price of the economic enterprise is kept too high, typically through tariffs and related policies. This is in principle quite different from what happens in an "ideal-typical" socialist economy. Their prices are kept high to adjust demand to the available supply. Where they are not allowed to fulfill this allocative function, as is typically the case for house rents in socialist countries, they are replaced by another allocation mechanism, such as rationing or political influence. When prices are kept high by tariffs and related measures, resources are induced to flow into a protected industry. As a result, however, this does not lead to flows to the budget so that protected industries consume domestic savings by budget- ary erosion. It is this latter fact which immediately makes it obvious that there has been a misallocation of resources. - 13.94 The arguments suggest strongly that the government should reconsider its price policy for economic enterprises. There simply is no way around the really elementary propositions that the proper allocation of resources will maximize output, that only greater output can permit both more investment and more consumption (whether subsidized or not), and that any distortions and inefficiencies in these allocations, for example, by making individual enter- prises "look good" by granting them high prices or other concessions will show in the budget. The assembly of TV sets once more will serve as an example. It is possible to make any individual enterprise look good. It is not possi- ble to make all of them look good at the same time. And it is the budget which will show what really happens. 13.95 In Syria both types of price policy are used for public enterprise products; for some, such as textiles, prices are kept too low "for social - 453 - reasons"; for others such as television sets they are kept too high. In addition, as Chapters 9 and 10 amply demonstrate, "profits" of economic enter- prises are inflated by artificially low depreciation rates, but again the result appears in the budget. Such "profits" transferred to the budget really represent capital consumption (depreciation) and under the most favorable cir- cumstances require equally inflated investment allocations. At best nothing has happened, at worst--and this is the case in reality--the capital consump- tion is allowed to continue and output suffers. There is thus a very strong case to be made for a different price policy to allow the economic enterprises realistic prices--higher in the case of textiles, lower in the case of TV sets. 13.96 We still cannot leave the subject here. The case of pure consump- tion subsidies will be taken up further on. It has to be considered that the low profits made by economic enterprises have their root in low productivity. The government is in fact looking into this matter. Wage policy is vitally involved. In an "ideal-typical" socialist system wages are the only income. A socialist system is not so much defined by the absence of rents and profits but by the fact that these rents and profits accrue to the community at large rather than to individuals. If enterprises do not make sufficient profits, economic wages are lower than wages actually paid. This implies that though de jure there are only wage earners, de facto there are rentiers. It implies secondly that, since someone has to pay the implicit subsidies or, more gen- erally put, since the wage payments require real resources which are not at the same time available elsewhere and since the wage payments are greater than the output created by labor, it implies income redistribution to the wage earners. This income distribution does not, however, come from the relatively rich, as it might in a capitalist economy, but instead comes essentially from the farmers, and generally from those not fortunate enough to have de facto access to the budget. The Fourth Five Year Plan in its "policy" section does rightly speak of fixing wages in some relation to productivity, though this statement never appears in unqualified form. The government might feel better about omitting the "social" qualifications in wage policy if it realized how often in fact modifications of the productivity principle have led to a more uneven distribution of incomes, that is, a redistribution of incomes from the relatively poor (farmers) to the relatively rich (urban industrial workers). 13.97 It is not uninteresting in this connection to refer to a fact which evidently is troubling the Syrian Government, namely that wage payments are an extraordinarily small part of gross value added. This does not mean, as some government officials and others have apparently interpreted it to mean, that the rest is profits and depreciation. The analysis in Chapters 9 and 10 clearly shows that this is not the case. What the figures mean is that after years of planned industrial and social (as well as socialist) development, the bulk of incomes is a combination of property and wage incomes accruing to small-scale farmers or other small-scale producers and tradesmen, working for themselves alone or with members of their families, who are not paid a money wage but who receive the proceeds of the sales of their product. Eco- nomically speaking, the great bulk of these incomes are wages, but they do not appear as such in national accounts statistics. It is this element of the population which pays the difference between what "industrial" labor produces and what this "industrial" labor is paid. - 454 - Subsidies and the Budget 13.98 Subsidies are a legitimate part of the budget. There are two main problems that arise: (1) who or what should be subsidized; and (2) how much can be spent as subsidy, considering that the government has a great variety of objectives which compete for resources? It may be useful to distinguish between production and consumption subsidies. 13.99 One of the competing objectives is industrialization. In 1977 the government is subsidizing most industrial production de facto, although this probably has not been the intention in many cases. The choice of projects without careful analysis is probably primarily to blame for the unintentional subsidies. Subsidies for production are justified to overcome temporary diffi- culties (whether they are the best method is another question) and on princi- ple they should be treated like any other investment funds that are expected to pay for themselves over the life of the project. "Pay for themselves" is to be understood to mean "from the standpoint of the economy as a whole", which in turn implies correct factor and goods prices, realistic valuation of possibilities, and allowing for as many repercussions in the economy as possible. 13.100 The problems of shadow pricing of factors lie outside the terms of reference of this chapter, except that it is necessary to point out that some consideration will have to be given soon to these problems as a guide to wage, interest and foreign exchange policy. The Government may well wish to request technical assistance in this respect, particularly as it has expressed its determination to reform the wage structure and to link wages to produc- tivity, to be sure, modified by other social considerations. Unfortunately, the draft Plan contains no reference whatsoever to the fact that policies with respect to other factor prices, particularly interest rates and the foreign exchange rate, require the same attention as wages, for the identical reasons and on principle with the identical purposes; interest rates, too, should have something to do with productivity, and here, too, special arguments may induce the government to favor a particular sector with an implicit subsidy in the form of a reduced interest rate. Of course, higher wages than correspond to productivities are subsidies to groups of people and have unquestioned deleterious effects on factor allocations. Lower interest rates than corres- pond to the productivity of capital in the economy also have these deleterious effects, though there are no "capitalists" who gain since the capital is Gov- ernment owned. The gainers here are the workers and administrators in the subsidized firm, the losers are the rest of the population which necessarily loses an equivalent amount of budgetary expenditures directly or indirectly. 13.101 In general, we repeat, productive subsidies are to be treated as investment funds, justified only if they lead in fact over the lifetime of the project and at realistic prices to higher production. Consumption subsi- dies are another matter. All societies would agree that the poor and unfor- tunate are a responsibility of the more fortunate members of society. The - 455 - principle of consumption subsidies needs no defense. The problems are never- theless manifold: Who should get them? How should they be organized to achieve their objectives with the least cost? How much can society afford? 13.102 A richer society can afford more subsidies than a poor one. Per- haps, better, a more productive society can afford more than C less produc- tive one. Subsidies should not be allowed to interfere with productivity, and should not be allowed to lead to distortions of the price structure. As Chapter 5 has pointed out, they probably do not distort the price structure very much, except perhaps in the case of textiles. 13.103 It should also be obvious that subsidies should not reallocate income from the poor to the rich. It is more debatable whether the present subsidy structure in Syria has or has not a favorable income distribution effect. As has been shown in Chapter 6, there has apparently been a consider- able deterioration of agricultural prices compared to industrial prices. The income distribution effects of this development must be judged to be unfavor- able, as there is surely no evidence that per capita income in the urban industrial center was or is lower than in the countryside. Nor is there evidence that the subsidization involved in the change in the terms of trade in favor of industry at the expense of agriculture has led to a more rapid growth of industry. In the long run, taking the good crop years with the bad, the evidence is that even at the distorted domestic prices industry has not grown very much faster than agriculture. At undistorted prices industry would by implication have grown less rapidly. It is implicit in this development that there has been a redistribution of income from agriculture to industry, not offset by adequately increased industrial production. The income (listri- bution effect this implies is unfavorable. 13.104 As Chapter 6 also points out, the prices of consumer goods appear to have risen less rapidly than the prices of investment goods. The former are influenced more by consumption subsidies, whereas the latter are more subject to international influences. In both cases an overvalued exchange rate (if it existed) would have kept prices below an undistorted level, and the cost of investment as distinct from the cost of investment goods (which is what is measured by the implicit deflators) would be further distorted downward by low interest rates. 13.105 As Chapter 6 has pointed out, the effect of consumption subsidies as actually practiced in Syria has probably been neutral as far as income dis- tribution is concerned. By keeping consumption prices low it has stimulated consumption at the expense of investments. But when put together with the deteriorated terms of trade of agriculture (and of services) the net effect must have been a deterioration of the income distribution. Agriculture is taxed enough to finance investments in towns while paying higher wages in industry than corresponds to productivity. Both agricultural and industrial workers pay the same low prices for consumer goods. In the case of industrial - 456 - (generally urban) occupations this frees more money for the purchase of in- dustrial goods, some of which are also subsidized. It does so also in the case of agricultural incomes, where however, the proportion of income going for subsidized goods is probably much higher because the subsidies to indus- tries have siphoned off much of the "free" income in the country. 13.106 If and to the extent that, our analysis (and that of Chapter 6) is correct, the subsidy system has not achieved either its productive or its equity objectives, and it is inconsistent with the savings-growth objectives. Productive subsidies (mostly indirect) have mainly distorted prices and have not led to particularly impressive growth rates in the subsidized sectors. In fact they must have negative income redistribution effects in favor of a relatively small urban wage-earning group employed in industry. Consumption subsidies have been general and the rations sufficiently big to affect every- one in the same way. They have in fact not served the objective of equity, whatever the intention was. They have therefore been too big almost by defini- tion. 13.107 The fact that subsidies have worked in this manner comes out in the budget. The funds required for subsidies compete directly with the savings required for investments. In part this is the consequence of inadequate pro- ductivity of public enterprises: as Chapter 5 has pointed out, subsidies have in part been used to finance inefficiencies which in themselves therefore imply a negative income redistribution. In part the big size of subsidies reflects the indiscriminate nature with which. they are given whether needed or not, a method of organizing them which would be excellent if it were possible to use a sophisticated progressive income tax system to recoup the resources from the rich, but a system which works in the opposite direction where it is coupled with taxation that falls largely on other poor, that is, low-income farm families. 13.108 The cost in terms of foreign exchange and growth foregone are high, since consumer goods must be imported where incentives in agriculture or in industry have been reduced by taxation in the first place. That is, the system as it stands has been self-defeating. Unfortunately, since it has been going on for some time, the economy and people have had time to adjust to it, and new vested interest positions have been built up which make change difficult. Also, if and to the extent to which our analysis is correct, it would not do just to abolish subsidies and hope that everything else could work out for the best. Moreover both the reasons for and the methods of subsidization vary too much so that abolishing subsidies itself involves a variety of things. 13.109 Since productive subsidies make sense only if their effect is an increase in production in the economy (not just in the subsidized project) the major reform needed is improved project preparation and selection and the limitation of subsidies to cases that can be economically justified. The im- plications are a revision of price policies with respect to goods and factors of production. This need not mean reducing wages; it could mean, for example, raising labor productivity. This can be done through adoption of different - 457 - norms; more careful use of capital; reduction of planned fixed investments where additional shifts can raise the ratio of labor to capital; and the use of investment funds thus saved either for investments elsewhere in the E!CO- nomy (whether economically or socially justified) for reducing taxation, or for income redistribution. The employment effects are uncertain. Raising norms for la'or would justify the excessive wages paid, but would reduce employment required for the same output. But an increase in output through lower prices even with the same labor/capital ratio would at the minimum off- set any unemployment created by higher norms (it depends on various elastici- ties) and an increase in the number of shifts would raise employment and output. 13.110 The example serves as a reminder that the productivity of the factors of production and their rational allocation is at the heart of the problem of all development, including that of Syria, and that the abolition of productive subsidies would by itself not have the desired results; that in fact their abolition would mean a new policy for prices, wages and pro- duction. 13.111 The pure consumption subsidies are a slightly different matter. It may be desirable to ensure that the whole population gets a certain minimum of "vital" goods. It does not follow that the government, to achieve that end, must give everyone the same ration at the same low price--unless the administrative cost of discriminating between the "poor" and the "non-poor" are so high as to absorb any savings involved in limiting subsidies to the 'poor". In any case, to the extent to which the "poor" have been made so by a tax and price policy that has reduced their income relative to the "non-poor" it seems more rational to adjust their incomes rather than give them back part of what was taken away from them. Consumption subsidies in a country whose current budget is expected to provide savings to the economy are better limited to target groups, and to amounts that do-not interfere with the pro- vision of the savings. But there, too, it is necessary to make sure that the savings are invested in a growth inducing manner. The budget is the first place in which the effect of both production investments and subsidies come together. The true choices become apparent in the budget. Summary: Principles of a Policy Package 13.112 It would be unreasonable to expect the development of a detailed policy package at this stage; it is clear that there are distortions in the Syrian economy, but their precise order of magnitude is not known. It is, however, possible to develop the general principles that should be followed, as brought out in the discussions of the various chapters in this report. The most important matter is the introduction of, and adherence to, a reason- able standard of project preparation and evaluation, and a determination to separate economic and social considerations right from the start. We have developed the idea that it might be much more effective to reach the legiti- mate social ends of the government by such a separation. At the very least, it would give the policy makers much better advance knowledge of whether a - 458 - given investment will in fact generate the expected growth (real resources) and what its cost will be in terms of growth foregone in particular social policies. Chapter 6 has made suggestions on price policy that are directly relevant. 13.113 The government is considering the creation of a specialized invest- ment bank through which all investment requests are to be filtered. What the government evidently has in mind is an autonomous agency insulated from centrifugal political pressures. By implication, the present set-up has lent itself to such pressures. 13.114 Whether such a suggestion represents a solution depends not only on the quality of its staff. After all, the State Planning Commission is intended to be precisely such a coordinating and filtering organization advis- ing the Prime Minister on final political decisions, their likely effects and their presumed cost. It is a priori not clear why a new organization should work any better without political changes; even though the final decisions must inherently remain with the political level. An economist-planner can only suggest improvements in the raw material needed by the final political decisionmaker. The only thing an economist-planner must insist upon is that everything has a price, that politial ends do require economic means, and that therefore it is to the interest of the political level not to waste resources by bad decisions, whether intentional or accidental. 13.115 A proper project evaluation does require consistent and "honest" prices. In this respect this chapter only reinforces what has been said in Chapter 6. It can, however, make an additional point: the establishment of reasonably correct prices is a major policy problem. In industrialized coun- tries it is at times urged--and reasonably so--that subsidies and taxes be used to change "wrong" into "right" prices. In developing countries such a policy meets too narrow limits to be practicable, simply because the budget is expected to provide the major part of national savings, and because in a socialist economy the major part of these savings is expected to come from the profits of economic enterprises. The economic efficiency of these enterprises is of major social concern. It follows that the socialist economy can fulfill its function only if it produces real profits at undistorted prices. There- fore it does not make sense either economically or socially if the enterprises earn such profits only at distorted prices, implying a transfer of income to the enterprises in the first place instead of a creation of income by these enterprises. It follows that setting economically justified prices both for factors of production and for the final outputs becomes essential. 13.116 We suggest therefore that the Plan aim of linking wages to produc- tivity be given high priority. Social aims are also best achieved directly rather than through distorted wages. The policymakers must know how large a share of resources they can afford to divert to wage payments above the product of labor. Such subsidies might appear directly in the budget and would have to be specially justified. For example, a basic wage would be paid, based upon productivity alone. If this wage were considered too low, the questions to be answered would be: (a) whether an industry only capable 43i - of paying such a low wage makes any contribution to the society; (b) whether the productivity cannot be raised by various means; and (c) whether a wage- earner's income is too low, not in terms of his productivity but in terms of his family situation, so that his wage might be supplemented by special payments from budgetary sources. 13.117 Of central importance is the foreign exchange rate. In 1977 the exchange rate was free; casual enquiries about a black (or free or parallel) market suggested that the Syrian pound was essentially correctly valued. It follows from the projections made, however, that Syria is likely to run into balance of payments difficulties. Authorities have expressed concern about the necessity of reintroducing exchange controls, and as a short-run emergency measure they might well be inevitable. It should be stressed, however, that there is nothing sacrosant about any particular rate of exchange. The rate of inflation has been much higher in Syria than in any of her industriaL exchange partners. A devaluation might well become necessar' even if accompanied by temporary import restrictions. 13.118 Devaluation is frequently resisted with quite untenable arguments. It is true that it increases the equivalent in Syrian Pounds of any dollars spent or earned, so that by itself it tends to raise prices. This is the purpose of devaluation: to force the substitution of domestic for foreign resources--something every Plan professes to want--and to force the husband- ing of foreign exchange. It is not true that it necessarily reduces imports needed for development. It is the scarcity of foreign exchange which does that. If devaluation does not allocate the scarce foreign exchange,, import controls will. Devaluation is likely to raise foreign exchange earnings through exports, given the proper elasticity conditions. Total capacity for imports so necessary for development, and for foreign exchange earnings, is likely to be raised by devaluation. But only domestic producers who can cover the increased domestic resource cost can get the foreign exchange. This ought to improve resource allocation very much and lead to increased domestic employment, to increased exports, and to decreased willingness to incur further foreign debts and thereby burden future balances of payments. 13.119 It is necessary, as has been argued, to limit consumption subsidies to those groups who in the opinion of the political leadership cannot afford to pay economic prices. To the extent to which it is impossible tco lower prices in general by increased productivity, such subsidies have an important income-redistributing social function. It may, however, be more reasonable to abolish all subsidies and use the budget directly to pay income subsidies for persons below a certain income level. Such ideas are very rad-ical indeed and have not been put into practice even in the most industrially advanced countries where they have originated. In a socialist economy, even one with a large private sector, they might be more easily realized. 13.120 From the standpoint of a socialist economy it is important first to create output and safeguard growth, to allocate the factors of production as well as may be and to provide savings for the enlargement of productive capa- city. Since Syria is inescapably a small open economy, the resource alloca- tion must as inescapably take place within the context of exports and imports. - 460 - The amount of savings to be generated must depend on the one hand on what are the effective means of producing outputs, that is on economic profitability, and on the other hand on what are the total amounts of wage and income pay- ments to be made to the population at large. This choice, made in a market economy by interest rates and wage rates, cannot be escaped in a socialist economy, and to distort prices here and there, or give higher wages to special groups for inadequate output, or to allocate foreign exchange for, say, the assembly of unsaleable TV sets, or to keep particular textile prices low, merely muddles the decisionmaking process without leading either to more out- put or to more savings or to higher wages in general. - 461 - CHAPTER 13 APPENDIX 13A THE FOURTH FIVE YEAR PLAN (1976-80) 13A.01 The growth trend through 1975 had been encouraging. Per capita gross domestic product (GDP) (in 1963 market prices) in i960 was SL 654, in 1963, SL 798, and in 1975, SL 1404 (or SL 1255, depending on whether the higher World Bank (WB) or the revised CBS esti-mate is taken for 1975). I/ Either figure suggests very successful long term growth, particularly when it is considered that the estimated population rose by 60 percent between 1960 and 1975. The increase in per capita GDP at factor cost was somewhat less dramatic: it rose from SL 599 in 1960 to SL 1038 in 1975 (CBS revised). Still, GDP rose at factor cost by 73 percent over 15 years (or 4.9 percent a year on the average) compared to 92 percent at market prices (or 6.1 percent). 1/ Statistical Note (See also Chapter 3 and Volume 4, A Note on National Accounts Statistics): Every analyst of the Syrian economic situation has had to come to terms with certain problems with the official statistics. The Central Bureau of Statistics (CBS), has, in April 1976, revised its national accounts estimates for 1975 and particularly 1976, but not for earlier years. These revisions have affected, in particular, certain service sectors. While the decline in the GDP attributable to the transport and communic.ation sector may be in part due to declining pipeline dues, no explanation is given for the sudden lower estimates for example, for the contribution of the financial sector to GDP (See Chapter 3 and Volume 4, A Note on National Accounts Statistics). There appear, therefore, to be breaks in the time series both in 1973 and in 1975. For these reasons, the discussion of longer--run trends in this chapter relies more on the revised World Bank (WB) series, which up to 1973 differs only in minor respects from the latest official estimates. Unfortunately, the matter is not entirely academic, since the structure of the economy differs depending on whether the Worldl Bank or the CBS statistics are taken. Because the Fourth Five Year Plan 1976-1980 is in terms of 1975 prices, while the official constant price series are based on 1963 prices, crude estimates have-also been made for the individual components of GDP in 1975 prices, by multiplying each component series of the CBS or the World Bank estimates by a factor calculated as a fraction of the value of that subseries in 1975 current prices to its value in 1963 prices. This procedure, crude as it is, has seemed desirable also in view of the fact that petroleum prices have quadrupled and that adherence to the 1963 price structure seems to undervalue the contribution which petroleum has made to the Syrian Economy. - 462 - 13A.02 However, several facts place this substantial achievement in a somewhat different light. First, the socialist orientation of the economy has always put great emphasis on changing the structure of the economy so as to increase the importance of the commodity-producing sectors. 1/ In 1960, and in 1963 prices, these sectors contributed an estimated SL 1285.8 million to GDP; in 1963, that contribution was SL 1946 million, and in 1975, 3893.9 million. This is SL 284 per capita in 1960, SL 390 in 1963, and SL 537 in 1975. In market prices, the increase was somewhat less than that of GDP as a whole (89 percent compared to 92 percent). 13A.03 Second, the per capita contribution of agriculture and manufacturing was as follows (in SL): 1960 1963 1975 At 1963 Prices Agriculture 135 240 230 Manufacturing 115 110 186 At 1975 Prices Agriculture 293 499 Manufacturing 157 254 Thus from 1960 to 1975 the per capita value added accruing to agriculture rose by 70 percent, while that of manufacturing, by only 62 percent -- though between 1963 and 1975, the picture is somewhat different. Considering the substantial investments that have gone into industry, while the Euphrates Dam investment in agriculture has not yet had time to show results, the industrial development must be considered disappointing. On the other hand mining (mainly petroleum) output, reached in 1975 the level of SL 55 per capita at 1963 prices, but, more significantly, at 1975 prices was with SL328 per capita, bigger than the SL 254 contributed by manufacturing industry. 13A.04 Third, while GDP as a whole and per capita has developed satisfac- torily, the gross domestic savings ratio (to GDP) in current prices has shown substantial fluctuations, but has not increased over time (see Table 13A.1). The fluctuations are rather dramatic and suggest weaknesses in the statistics. Certainly, throughout the period 1963-1975, domestic savings appear not to have been sufficient to finance domestic fixed investments except in 1964 and 1965, both years of substantial accumulations of stocks. 1/ The commodity-producing sectors are agriculture, industry, and construc- tion. The definition of industry in this and other chapters always includes mineral production ("mining" of phosphate and petroleum), manufacturing, and electric power. Sometimes, however, it includes construction, and at other times follows the Syrian statistics in excluding construction; wherever a non-standard definition is used, it is clearly so indicated. - 463 - 13A.05 Finally, in all years since 1963, there had been a deficit in foreign trade. Nevertheless, by the end of 1975, Syria had built up substan- tial foreign exchange reserves (net foreign assets) of US$514 million, from a negative balance of minus US$35 million in 1972 (from Table SA 3E.1). Table 13A.1: GROSS DOMESTIC INVESTMENT, GROSS DOMESTIC SAVINGS, AND THE SAVINGS GAP, SYRIA, 1963-76 (Millions of Syrian Pounds (Percent of at Current Market Prices) Gross Domestic Product) Savings Gross Gross 'as Per- Gross Domestic Domestic Gross cent of Domestic Invest- Domestic Savings Invest- Domestic Savings Invest- Year Product ment Savings Gap ment Savings Gap ment 1963 3,980 495 468 27 12.4 11.7 0.7 94.6 1964 4,516 787 731 56 17.4 16.2 1.2 92.9 1965 4,749 665 654 11 14.0 13.8 0.2 98.4 1966 4,774 625 365 260 13.0 7.6 5.4 58.4 1967 5,013 579 396 183 11.5 7.9 3.6 68.4 1968 5,204 558 351 207 10.7 6.7 4.0 62.9 1969 6,200 1,153 835 318 18.5 13.5 5.0 72.4 1970 6,371 933 569 364 14.6 8.9 5.7 61.0 1971 7,487 1,468 1,020 448 19.6 13.6 6.0 69.5 1972 9,009 2,549 2,099 450 28.3 23.3 5.0 82.4 1973 9,711 1,247 918 329 12.8 9.5 3.3 73.6 1974 14,060 3,251 1,958 1,293 23.0 13.7 9.1 60.2 1975 19,468 6,121 3,755 2,366 31.4 19.3 12.1 61.4 1976 24,661 7,265 2,462 4,803 29.5 10.1 19.4 33.9 Source: Table SA 2B.4. 13A.06 As suggested, the extremely favorable development particularly between 1973 and 1975 may have led the planners to submit proposals which in the light of the developments of 1976 turned out to be quite unrealistic. GDP increased by 8 percent in 1976, manufacturing by 13 percent and agriculture by 9 percent; but ominously petroleum output fell slightly, the domestic savings ratio (in current prices) fell dramatically (from 16.1 percent to 6.9 percent the lowest level since 1968), the trade deficit reached record proportions, and net foreign assets were drawn down to a scant US$9 million by the end of the year. 13A.07 These various signs of strain in the economy are not unconnected; neither are they unrelated to the past. The large inflows of foreign (largely Arab) grants, after temporarily being stopped in 1976, have resumed at a much reduced scale and are increasingly uncertain. The investments made in the - 464 - past have either not had time to influence productive and taxable capacity (e.g. The Euphrates Dam) or have been disappointing. The surplus on the current budget, which in 1975 was still SL 1.4 billion, fell in 1976 to SL 0.5 billion due to a combination of circumstances (see Table SA 5B.9). Tax revenues and public enterprises surpluses hardly rose, while current expendi- tures continued to rise by SL 733 million, SL 381 million (or 52 percent) of which were due to increased defense expenditures. Thus there was a clear sign of budgetary trouble independent of the defense burden, a trouble that can be traced back in part at least to failure of past planning to link investment expenditures with future recurrent budgetary needs. The Fourth Plan itself, for which the first expenditures were made during 1976 contributed to the problem. It is in the light of this suddenly deteriorated fiscal and monetary situation that the proposals of the Fourth Plan have to be evaluated, and the future prospects assessed. THE FOURTH FIVE-YEAR PLAN 1976-1980 13A.08 The Draft Fourth Five Year Plan, dated June 5, 1976, was somewhat belatedly adopted in the first week of April 1977 with the understanding that it would have to be revised; the first revision was made at the same time. 1/ It will be discussed in detail below, where it will also be pointed out why further revisions to reduce the size and change the structure of the Plan are essential. Indeed, the only realistic question is whether the government will control the direction and the content of these revisions, or whether they will be forcibly imposed by events. 13A.09 The Plan, as adopted, is dated June 5, 1976; it appears to have been made retroactive to January 1, 1976. The Plan Law itself also states that while every Minister, Enterprise or Cooperative is responsible for its section of the Plan, the Minister of State for Planning will issue directives in agreement with the other agents responsible for the sectoral Plans, which become an integral part of the Plan (Plan, para. 4). Para. 5 of the Plan Law states explicitly that "No projects not in the plan may be introduced by the relevant agencies". This, no doubt, reflects an attempt to avoid the exper- ience of the Third Plan, which suffered precisely from the unplanned introduc- tion of new projects when money suddenly became easy. The General Tenor of the Plan 13A.10 The Plan goals are enunciated by the Ba'ath party. In the draft plan text the same goals are adopted; but the goals appear more as a list of desiderata rather than a list of priorities that have been thought through 1/ In this report "the Draft Plan" refers to the original June 1976 draft adopted in April 1977, and made available to the World Bank (in Arabic). "The Revised Plan" refers to unpublished advance data on the April 1977 revision; there was no published version of the revised plan. In the April 1977 revision, all the new projects were dropped but the ongoing projects retained. - 465 - as the first, or as the case may be, the next step towards the fulfillme!nt of longer-term ambitions. There are, however, a few more specific targets in the first Appendix on Global Targets: real growth rate of GDP of 12 percent per annum is to be achieved, or a growth rate per capita of 7.9 percent. It is neither clear how this target was set, nor how the individual project:s and policies are to work together to achieve it. There are, however, a few statements that give a clue to the thinking that went into the formulation of the Plan: self-sufficiency is stressed in major foods and clothing; and an increased degree of self-sufficiency in other commodities (Plan, para. 6); in energy as far as possible; in the means of agricultural production; and a start is to be made also with self-sufficiency in the means of industrial production (para. 9). The balance of trade in consumer goods is to be improved and if possible an export surplus of consumer goods is to be achieved (para. ll). Inflation is to be held to no more than 30 percent between 1970 and 1980 "especially the artificial inflation due to monopolistic market forces" (para. 12, p.3); domestic public financial resources are to be increased substantially to become an increasing source of financing develop- ment; and this is to be done by improving the efficiency of the tax ancl the tax collection system (para. 13, p.4). Public administration is to be improved and "experiments in local administration are to be strengthened and improved to guarantee the fostering of central democracy (our italics) and to improve the participation of the people in the building of the unified Arab society." 13A.ll Thus there continues-to be a strong bias in the Plan toward so- called import substitution (replacement of imports by domestic substitutes) and a further movement towards a "socialist" society, whatever that means precisely, though elsewhere in the Plan the private sector is given a more positive role. Of course full employment, regional development and the other usual targets are also mentioned. Growth by Sector of Economic Activity 13A.12 For years, the past plans have tried to change the structure of the economy so as to increase the role of the commodity-producing sectors of activity, and the role of manufacturing in particular. In fact, internal government reports on the fulfillment of earlier plans had made a major criticism of the failure to achieve that particular goal. Their estimates of the share of commodity-producing activities in net domestic product, updated by later figures from the CBS and by Fourth Plan estimates for 1975 and 1980, are shown in the following tabulation (Fourth Plan estimates at constant 1975 market prices; NDP estimates at constant 1963 market prices, GDP estimnates at constant 1963 factor costs; n.a. means not available): - 466 - Total Industry (Mining, Commodity Manufacturing, Power) Producing Manufacturing Total Activities Actual Past Performance: 1963 (Percent of net domestic product) 15.1 15.2 45.8 1970 (Percent of net domestic product) 15.3 19.1 40.0 1971-1975 (Percent of net domestic product) 15'.2 19.0 37.5 1970 (Percent of gross domestic product) 15.5 19.2 41.0 1975 (Percent of gross domestic product) 15.7 23.4 44.9 1976 (Percent of gross domestic product) 15.8 22.7 43.9 Fourth Plan Estimates: 1975 (Percent of gross domestic product) n.a. 22.4 45.0 1980 (Percent of gross domestic product) n.a. 26.2 46.2 1975-1980 (Compound annual rate of growth) n.a. 15.4 13.1 The estimates for 1963-75 may perhaps show balanced growth, but do not show any change in the structure of the economy. The figures from the Fourth Plan are based on unrealistic estimates for 1975 and suggest a substantial increase by 1980 in the role of industry, as well as a slight increase in that of the commodity-producing sectors. This is based on projections of an unprecedented compound growth rate of 8 percent a year in agriculture and 15.4 percent a year in industry. The planners must have known that mineral output could not in fact grow in the absence of new petroleum discoveries. The growth rate assumed is therefore virtually equivalent to a growth rate for manufacturing. The actual growth rates for 1970-75 and 1976 by sector of economic activity are presented in Table 13.5 along with our estimate of feasible growth by sector during the plan period 1976-1980, in both 1963 and 1975 prices. 13A.13 The Plan envisages a slight decrease of consumption from 77.4 per- cent of GDP in 1975 to 76.9 percent in 1980, accompanied by an increase of public consumption substantially bigger than, and of private consumption sub- stantially smaller than the growth of GDB (15.7 percent per annum and 10.2 percent respectively). The main trouble with the figures is that the gross domestic savings ratio at no time even approximated the 22.6 percent assumed to have been achieved in 1975; it was in fact 16.1 percent in 1975 and only 6.9 percent in 1976. Unfortunately it is only all too realistic to assume a further increase in public consumption. 13A.14 Investments are projected to remain at virtually the same high per- centage of GDP in 1980 as in 1976: 29.3 percent compared to 29.6 percent (Plan, p.6), while imports are assumed - realistically but ominously - to rise faster (7.5 percent per annum) than exports 7.0 percent). Both represent - 467 - accelerations compared to the Third Plan (6.5 percent and 5 percent respec- tively). The same is true for employment which is to grow by 4.9 percent (com- pared to 4.7 percent for the Third Plan) and even more for productivity: 6.5 percent compared to 3.3 percent for the Third Plan. 13A.15 Even without going into further details, it is obvious that the Plan is confronted by major problems and inconsistencies: if there was any detailed study behind the targets--and there is reason to doubt this--it is clearly assumed that the days of financial ease of 1973-75 would continue without question. The Plan assumed a base which was substantially more favorable than turned out to be the case, and it ignored the history of the economy which showed no dramatic structural change over 16 years (not even after the implementation of the Second Five Year Plan 1966-1970, which was to have changed the structure) and which showed no lasting increases in the domestic saving ratio, though it did show--despite the import substitution policy--the expected increase in the trade deficit. There is no indication of how or wherc the projected increases in employment are to be achieved in the face of evidence that many of the pro- jects are both very capital-intensive and very import-intensive. The increases in productivity also remain a datum to be achieved without any link to past achievements or to new projects. In the past five years output per worker at factor cost changed in manufacturing industry from SL 4912 in 1971 to SL 5502 in 1975 (WB estimate), or from SL 5543 at market prices of 1963 to S] 6567 in 1975. These are 3-4 percent per year increases. In 1973 or 1974, depending on whether the official estimates at market prices or the WB estimates at factor cost are used, output per man rose to SL 7292 (official, 1974), or SL 5888 (WB, 1973). These increases are of the same order of magnitude as those envisaged by the Plan, but they were achieved, at least in the case of the WB estimates, by a substantial reduction in employment. - Sector Targets and the Investment Program 13A.16 Annex 2 of the Plan (pp. 8-43) gives targets for output or value- added by sector of activity and Annex 3 (pp. 45-242) gives the Investment Program, a detailed list of public investments to be carried out by sectors. The Agricultural Plan is analyzed in Chapters 7 and 8. A growth rate of 8-10 percent seems impossible over the next five years. The agricultural plan also talks in terms of the self-sufficiency, export surpluses, and "large-scale production units" (p. 9, 12) which may be variously interpreted as mechaniza- tion (hence not always employment creating) or as state or cooperative farms, a structural transformation directed against the private sector. 13A.17 Value added accruing to industry is to increase by 15.4 percent per annum. 1/ Economic import substitution is stressed, as well as use of domestic raw materials and changing the structure of commodity exports by 1/ The Preliminary Draft Plan says: by 104.7 percent by 1980 or 15.4 per- cent per annum (p. 13). However, 15.4 percent per annum compcounds after 4 years to 104.7 percent; it compounds to 105.9 percent after five years. - 468 - raising quantities and qualities to needs of Arab and foreign markets. Physical targets are set for a number of goods, and industry is to be spread throughout the country. 13A.18 There are specific targets for petroleum and petroleum prospecting: geophysical surveys for 75,000 sq. km; 1/ further prospecting in 305,000 sq. km; 87 new wells; 1.5 billion cu. m 2/ of natural gas; 52 million cu. m of crude oil; storage tanks for 10 percent of annual crude oil production; and increasing the capacity of the pipe line, expansion of the refinery to an 11 million t 3/ capacity. There are similar targets for added capacity for electric power or to bring 350,000 new customers and 800 new villages into the grid. 13A.19 The "strategy" envisaged always stresses the same points (Plan p. 17): use domestic raw materials, and increase capacity utilization to decrease cost; optimize the use of available manpower and eliminate disguised unemployment; spread industry over the whole country "in a rational manner", and introduce advanced technology in new projects, while modernizing existing capacities. Enough has been said to point not only to an essentially inner- directed physical planning, but also to at least the use of such words as "optimal" and "rational" that permits in fact a great flexibility in action, if so desired. 13A.20 Although the whole Plan deals only with the public sector, its rela- tion to the private sector is made clear in the targets for retail trade, which envisage an expansion of cooperative and public retail stores "parallel with private trade in order to control the market and achieve price stability" (Plan p. 21), while the role of prices is acknowledged in the desire to "unify prices of goods which are produced, imported and distributed by the public sector in the whole country" (Ibid), as well as to "unify the basis of pricing of imports and domestic production of the private sector" (Ibid). The prob- ably deliberately vague formulation may hint at the necessary reform of the price system about which more will be said below and which was discussed in Chapter 5. But it may also simply be an expression of a rather simplified notion of the causes of inflation and how to deal with them: i.e. inflation is the result of profiteering by the private sector and these profits are to be eliminated by public competition which will bring prices down. 13A.21 Under the Plan, foreign trade, which is mostly in public hands, exists to export surpluses and to import what is needed. It is to be used specifically to aid Arab integration, strengthen exchange with socialist and friendly countries, as well as with revolutionary third world countries; to change the structure of exports from raw materials to semi-finished goods, and 1/ One square kilometer is equivalent to 0.386 square mile. 2/ One cubic meter is equivalent to 1.3079 cubic yards, or 35.314 cubic feet. 3/ One metric ton is equivalent to 1.1023 short tons or 0.984 long ton. - 469 - to increase the role of the public sector in foreign trade. Import trade is to minimize imports of non-necessities and "of goods that can be produced at home, even if domestic goods are not of equal quality" (i.e. to encourage import substitution) (Plan p. 23), to concentrate on raw materials and machi- nery imports, to eliminate foreign middlemen. The flavor of the document is obvious: imports substitution; physical planning on the whole, distrust of the market and the private sector, but no desire to eliminate it, just to "control" it by providing competition, which, however, may be but probably should not be subsidized by the budget (see the comments on the unification of prices). 13A.22 It is natural that the bulk of the Plan - Annex 3 - should consist of a list of projects. The comments on this list are, to start with, l:wofold. First, the projects (which are listed by sector) are classified as either ongoing, new, or reserve projects (Tables 13A.2, 13A.3 and 13A.4). The on-going projects are self-explanatory. New projects are projects for -which financing was thought to exist and were therefore included in the draft Plan, while reserve projects were projects to be included if financing could be found. (In fact all new projects were shifted to the reserve category in the April 1977 revision of the Plan due to financial constraints). Second, the Plan gives the total cost of the project, the cost of the tranche to be executed during the Plan period, and a column labelled "credit facilities." Total cost may be bigger than the tranche to be executed during the Plan period because part was already executed before or because part is to be executed during the next plan period. "Credit facilities" refers to offers of foreign financing considered reasonably firm at the time. Table 13A.2: FOURTH FIVE-YEAR ECONOMIC AND SOCIAL PLAN (1976-1980) (millions of Syrian Pounds) Ongoing New Reserve Total Ministry/Department SL x SL % SL % SL Euphrates 7,379 27 60 - - - 7,439 Irrig. & Agrarian Reform 456 2 639 4 310 4 1,405 Agriculture 1,226 5 677 4 178 2 2,081 Industry & Mining 7,403 27 2,487 14 2,200 27 12,089 Power & Fuel 4,277 16 3,708 21 990 12 8,975 Transport. & Communic. 3,481 13 1,655 9 1,555 19 6,690 Trade 214 1 730 4 281 3 1,224 Housing & Utility 983 4 3,014 17 371 5 4,368 Services 1,755 6 3,439 20 2,245 28 7,439 Municipalities - - 1,034 6 - - 1,034 Others - - 160 1 - - 160 27,174 100% 17,604 100% 8,130 100X 52,907 Percent of Total: 100% Ongoing 51.0 New 33.0 Reserve 15.0 - 470 - 13A.23 Between 50 percent and 80 percent of all projects included in the Plan were included without any kind of cost-benefit analysis. Obviously such an analysis was made for the major Euphrates Dam project which, however, ante- dates the Present Plan. The difference between 50 percent and 80 percent may be more apparent than real, the one number referring to the number, the other (smaller) to the cost of the projects. During the chaotic period after 1973-- which turned out to be also a period of easy foreign money--the Government attempted to execute and to contract for as many projects as possible. Hence contracts were let out, mostly to foreign contractors, mostly from the East, even for projects with inadequate preparation or without any preparation at all. It is not clear where the ideas for the projects came from. Some proj- ects were of the "obvious" kind: it was thought superfluous to make a de- tailed study of cement production, as the "need" was obvious. In other cases, the "needs" were assessed by taking population figures, assuming a per capita consumption, and on that basis decide to have a plant, which was submitted to contractors for bids. In such cases, at least some cost effectiveness criteria were applied. 13A.24 The State Planning Organization (SPO) has a manual (in Arabic) on how to prepare projects for inclusion in the Plan, dated 1973; apparently a simplified adaptation of UNIDO suggestions. This manual was not applied in the past, but it would be applied from now on (after the recent reorganiza- tion of the SPO). There are tables evidently dating from the East German days, which were to be filled out, but these tables are of the commodity balances variety, and require no information on benefits. In no case, there- fore, is there any direct link between the cost of inputs and the value of outputs. And in no case is there any connection between investment, output, taxable capacity and future recurrent costs, which is, or should be, central, in view of the fact that the budget is to provide (through taxation) the major means of financing the investments. 13A.25 The aggregative and financing aspects of the Plan bring out the major problems with its execution as well as with prospective developments. Two aspects are of major interest: the size and structure of the program, and the ideas about financing it. The Plan's investment estimates (Table SA 5B.4) range from merely indicative to reasonably firm. The total of SL 54.1 billion includes private as well as all public investments, including new and reserve projects. The figure for public investments alone is SL 44.7 billion including reserve projects, and SL 36.5 billion excluding reserve projects. Ongoing projects alone are SL 27.2 billion. The first point to note is the intended dominance of the public sector: only 17 percent of investments are intended to be private. Nevertheless, this gives a substantially bigger role to the private sector than the Third Plan, which envisaged only 11 percent of total investments to be private. Second, there is a substantially different structure envisaged for public and private investments; only somewhat less than a quarter of total public investment is to be in the social sectors, compared to somewhat more than half of private investments. 13A.26 The envisaged structure is thus clearly consistent with the aim of the government to make the public economy dominant and pathbreaking while - 471 ¢ giving more of a role to the private sector than in the past. It may, how- ever, also be in recognition of the fact that in the Third Plan 1971-75 period the private sector invested more than three times as much as was planned for it while the public sector fell short by almost 30 percent (and by almost 40 percent in manufacturing investment (see Table SA 5B.6). 13A.27 The relative neglect of social investments is particularly great in the on-going projects, a fact that will present the Government with some unpleasant choices. Of all ongoing public projects 90 percent are in the commodity producing sectors or the service sectors closely linked with them; only 10 percent are in the social sectors. During,the first week of April 1977, the first revision of the Plan decided to eliminate all new projects, but to execute, come what may, all ongoing projects. There are many reasons why this decision, reflecting legal rather than economic consideratioms, is neither optimal nor feasible. It is doubtful what economic gain there can be from executing dubious projects simply because they are classified as "produc- tive" or "commodity producing" while eliminating projects such as housing or local water supplies simply because they are in the social sectors, when they affect the well being of the population substantially and directly. - 472 - Table 13 A.3: FOURTH FIVE-YEAR ECONOMIC AND SOCIAL PLAN (1976-80) ONGOING MAJOR PROJECTS (millions of Syrian Pounds) 1976-80 Actual Plan Investment 1976 1976 1977 1978 1979 1980 I. Agriculture, Irrig. 8,161 Euphrates Dam 207 112 73 40 45 31 18 Maskanah 1,390 103 130 220 300 360 380 Euphrates Basin 5,782 385 402 167 131 1,684 1,617 Grain Storage 260 62 62 75 70 38 15 Livestock Stations (14) 211 25 57 113 42 - - Grain Mills 311 - - - - - - II. Ports, Railway, Roads 1,681 Tartous Port 327 - 54 96 81 73 23 Latakia Expansion 357 - 33 84 95 95 50 Railway (Akkari-Homs- Dams) Tracks 300 - 48 67 65 65 55 Rolling Stock 252 - 60 40 40 50 62 Highways II 445 - 22 105 105 106 106 III. Mining and Manufacturing 5,587 Phosphate Homs Tri-Super 742 115 100 400 242 - - Homs Ammonia-Urea 737 142 158 225 200 154 - Deir-ez-zor Paper Fact. 339 110 46 150 121 22 - Hama Tire Factory 380 3 40 175 125 40 - Petroleum Exploration 900 - - - - - - Banias Complex 1/ 1,514 191 299 514 510 - - Cement Three: Aleppo/Hamma/Damas 217 144 127 80 8 2 - Tartous 353 26 66 137 114 35 2 Sheikh Said 405 43 188 90 90 37 - IV. Power and Water Supply 2,164 Power Generation 573 - - - - - - Transmission 381 - - - - - - Distribution 600 - - - - - - Water Figeh-Damas Tunnel 290 - - - - - - Distribution Network 320 - - - - - - V. Tashrin University 637 100 100 137 125 150 125 Grand Total of Major Projects 18,230 /1 of which Banias Refinery SL963 million. /2 means not available. - 473 - Table 13 A.4: FOURTH FIVE-YEAR ECONOMIC AND SOCIAL PLAN (1976-80) NEW MAJOR PROJECTS (millions of Syrian Pounds) Dam Construction and Irrigation Network :315 Deir-ez-zor Poultry Farm :350 Buying New Buses 300 Deir-ez-zor Tri-Phosphate 450 Cement 1,475 Tartous II 374 Musalamieh 150' Rastin 200 Adra 350 Aleppo 400 Sugar 568 Raqqa 167 Mesken 167 Ghab (South) 170 Deir-ez-zor 64 Gaz Utilization 197 Phosphate Factories 181 Power 3,122 Generation 1,882 Transmission 935 Rural Electrification 305 Railway Modernization (Aleppo-Hama-Homs) 190 Highway Ghab-Ain Sharkiyah-Jableh 220 Housing Units 1,800 Grand Total 9,168 - 474 - Proposed Financing of the Plan 13A.28 The Draft Plan gave an estimate of financing available for SL 36.7 billion in public investment excluding reserve projects but including both ongoing projects and the SL 17.4 billion in new projects subsequently elimi- nated in the April 1977 revision. The major sources of financing anticipated were described as follows (in billions of Syrian pounds): Surpluses of Public Enterprises 19.8 of which: Industrial Enterprises (14.6) Surpluses of Administrative Units 3.8 Exceptional Resources 12.6 Other Resources 0.5 Total Anticipated Financing 36.7 The item Exceptional Resources essentially represents the overall deficit to be financed by foreign capital inflows. Although planned external financing of one-third of investments might not be totally unrealistic in all cir- cumstances, there is substantial reason to believe it to be so in Syria's situation in 1977. Grant money is not likely to be available any more in substantial quantities, as all lenders including Arab lenders make it clear that loans can be had only for projects for which a reasonable feasibility and cost-benefit analysis has been made. No such cost-benefit analyses have been made for the present Plan, and to make a start with such analyses now implies- at least that there has been substantial slippage in the execution of projects.. 13A.29 Moreover, most foreign financing is available mainly for the foreign exchange cost of a project. Most ongoing projects are turn-key projects which are likely not only to be more expensive than necessary, but to maximize rather than minimize the import content of a project. At the very least this leads to rather expensive, short-term supplier credits which would lead to severe balance of payments repercussions within a fairly short term. 13A.30 Furthermore, the surpluses (from various budgets) projected in the Plan (Table SA 5B.lO) are remarkably small, yet even so may be overoptimistic. As the Plan details this financing, 27 percent is to come from surpluses of municipalities, 61 percent from the customs administration, the rest from "popular works" (4 percent); educational establishments (7 percent and con- struction taxes and fees (1 percent). A current budget surplus proper (of revenue over recurrent expenditure) is not considered as a source of financing. This remarkable fact may have two reasons. First, it is really the profits of the public sector enterprises that are to finance the expansion of the economy, and indeed SL 19.7 billion of the total 82 percent of total local resources or 54 percent of the total to be financed whether by domestic or foreign resources is planned to come from the resources of public economic enterprises. Second, however, there is a certain realism in the matter in that it is unlikely that the recurrent budget can generate sizeable savings for the financing of the investment program. Tax and non-tax revenues other than public enterprise surpluses were SL 2,806 million in 1975 and SL 2,601 million in 1976. Current expenditures except for defense and national security were in 1975 SL 1,881 - 475 - million, in 1976 2,233 million. The substantial "surplus" in 1975 of 925 million has in 1976 shrunk to SL 368 million. Even without the substantial expenditures on defense and national security of SL 3.3 billion (1975) and SL 3.8 billion (1976) it seems unlikely that the ordinary budget could generate any substantial savings. 1/ "Other" resources are essentially small amounts of non-inflationary borrowing. In fact the detailed Plan tables make it clear that the total amounts are put into the Plan as pro-forma amounts. This leaves the most important part: the resources of economic enterprises. 13A.31 The largest contribution is expected to 'come from industrial enter- prises, including mineral production (largely petroleum) and electricity. They are expected to have surpluses of SL 14.6 billion, or 75 percent of total public enterprise surpluses. However, of the SL 14.6 billion, SL 8.7 billion (or 60 percent) come from Petroleum, which is thus expected to finance 24 percent of planned investments, and 36 percent of domestic resources. The other important contributing sectors are Banking (5 percent) and Commerce (7 percent). The only other enterprise sector that is expected to contribute more than SL 1 billion are the Chemical and Engineering Industries with SL 1.5 billion, or 10 percent. The Electricity enterprises come close with SL 0.9 billion. Phosphates are expected to contribute SL 0.8 billion. 13A.32 Thus the projections of the Plan imply that past investments have not borne the hoped for fruits. In fact, the evidence points to the figures being, if anything, over-estimates of the contribution that can possibly be expected by the enterprise sector. It is important to give the reasons for this statement, not only for the assessment of the realism of the Plan, but for the desirable policy changes that are implied. The figures are, on the one hand, optimistic despite their smallness because, as Volume 3 Annex 3 documents in detail, "profits" of the enterprises are overstated through the use of historic cost in calculating depreciation. Given the two-digit infla- tion, a realistic valuation of replacement cost, say, at twice the original cost, would wipe out such profits as are shown. The enterprises are therefore not in a position to maintain their capital either directly (by using their funds directly rather than transferring them to the budget) or indirectly (that is, their transfer of funds to the central budget are less than they require to maintain their productive capacity intact). What looks on paper like a satisfactory profit turns out to be in fact capital consumption. A not-at-all pleasant implication is that in such cases wage payments contain a substantial element of economic rent. 13A.33 For most subsectors, the annual projections suggest that the govern- ment expects improved profitability, for example, in the weaving and spinning branch where the 1976 contribution of SL 46.6 million is expected to rise by 1980 to SL 288.2 million. But there are other sectors, such as cotton market- ing and baling, where the contributions are expected to remain essentially the same or even to decline. For sugar or cement the substantial projects by 1979 or 80 also seem unrealistic in view of the doubts expressed earlier (Chapters 8 and 10). 1/ For greater details, see Chapter 11, Fiscal and Monetary Policies, and Appendix ll.A to Chapter 11, Public Finances: Prospects and I-ssues. - 476 - 13A.34 However, the price policy of the Government has depressed the profits of those enterprises like spinning and weaving, that produce "vital" commodities subject to centralized price control. Prices of public enter- prises are strictly controlled; the Government has expressed the idea that enterprises should check the "profiteering" of the private sector, should act as a yardstick, and be used as a means of fighting inflation. To be a good yardstick, the public enterprises would have to be more efficient than private enterprises, which in the textile sector does not seem to be the case. To be efficient as inflation fighters, public enterprises would have to be able to supply the market at a lower price, that would nevertheless cover all costs realistically calculated and that would include adequate profit to be trans- ferred to the central budget. This condition is not fulfilled either. If it is not, the inflationary pressure is simply and directly shifted to the budget which then has to finance an amount of investment swollen by replacement demands with budgetary means reduced by the reduced profits of enterprises. In short, the contribution of the enterprises (except for petroleum) is as low as it is partly because of the low efficiency of the enterprises, but partly because of a government price policy that tries to fight inflation and satisfy social ends with the same inadequate means. 13A.35 The conclusion of this brief discussion must be that the size of the Plan is too big in the aggregate, that neither the foreign financing nor the most important sources of domestic finance are likely to be forthcoming in the amounts projected, and that a substantial revision downward of the Plan (beyond what has already been decided) is inevitable. 1/ 1/ It has not been possible to go into the question of whether the indi- vidual investments are suitable to achieve the planned growth rate or, for that matter, the other targets of the Plan, particularly in view of the absence of cost-benefit calculations. There are, however, sufficient indications that many of the investments in sugar mills, cement mills, and fertilizer plants are excessive and cannot possibly contribute to growth. There is every indication that financing expectations from both foreign and domestic resources are