|One Year Ahead||Five Years Ahead|
|Risk Category||Year Ago||Current 04/11||Worst Case||Best Case||Worst Case||Best Case|
The Wall of Fear Showing Cracks
In February 1982, the Baath Party government headed by President Hafez al-Assad launched an attack on the city of Hama, a stronghold of the militant opposition Muslim Brotherhood. At the end of the security operation several weeks later, large portions of Hama were leveled, and, according to independent estimates, some 10,000 inhabitants of the city had been massacred. The ruthlessness displayed by Assad’s regime came to be known as “Hama rules,” a phrase that itself became a shorthand explanation of how a regime led by members of the Alawite community, who make up less than 10% of the Syrian population, have maintained a stranglehold on political power in a country with a population that is overwhelmingly Sunni Muslim.
Bashar al-Assad, who became president following his father’s death in mid-2000, seemed an unlikely candidate to head a regime that held power on the basis of “Hama rules.” A British-educated optometrist with no military background, the younger Assad took office with a reputation as an advocate of both political and economic reform, and hopes were high early in his tenure that he might take steps to ease political restrictions. Although those expectations proved to be baseless, the assumption that Bashar lacked his father’s penchant for brutality remained.
Of course, the current President Assad’s first decade in power was untroubled by any domestic events that challenged that assumption. However, the regime has in recent weeks confronted loud demands for democratic freedoms from Syrians inspired by rebellions that toppled entrenched regimes in Tunisia and Egypt over a two-month period from mid-December 2010 to mid-February 2011. The authorities have responded to the demonstrations with deadly force, an approach that in the past would have resulted in a quick end to disorder, but in the current political climate has galvanized opposition to the regime, creating the potential for a worrisome escalation of violence.
As the threat of instability mounted in late March, Assad sought to appease the protesters. He signaled his openness to lifting restrictions on political activity, dismissed two governors blamed for failing to prevent deadly clashes between demonstrators and security forces, and accepted the resignation of the entire national Cabinet headed by Prime Minister Mohammed Naji al-Otri. Many Syrians expected the president to follow up the government overhaul by announcing plans to lift the decades-old emergency law in preparation for a broader program of political reform. Instead, Assad called upon the Syrian people to unite against the foreign agents who were attempting to destabilize his regime.
Assad has named Adel Safar, the agriculture minister in the outgoing Cabinet, to form a new government. Safar is member of the ruling Baath Party’s central executive committee whose ministerial record is rather unimpressive. Under his leadership, the Ministry of Agriculture has been identified as a particularly corruption government agency, and has come under heavy criticism over its handling of a recent water crisis.
In general, the regime’s response to the political turmoil suggests that Assad is prepared to follow the example of Libya’s Muammar al-Qaddafi, who unlike his Tunisian and Egyptian counterparts has refused to surrender his claim to power, even at the cost of propelling the country into civil war. But President Assad is wagering that the Syrian masses fear civil war more than they desire freedom.
Whether he wins that bet will provide a gauge of the effectiveness of the government’s propaganda machine. For years, the Baath Party has warned that an attempt to topple it from power would trigger a ferocious response from the minority Alawite population, which would show no mercy as it fought to preserve the social, political, and economic privileges it has enjoyed under the Assad dynasty. In that formulation, the Hama massacre was but an example of what the Alawite minority was capable of perpetrating when its interests were jeopardized by a Sunni rival.
The logic of that argument leads inevitably to the conclusion that there is no chance that the military and the intelligence services—both of which are tightly controlled by Allawites—might break with the regime, as happened in Tunisia, and Egypt, and Libya. Moreover, it is assumed that Baathist leaders could count on help from militant organizations in the region, such as Hamas and Hezbollah, for whom Damascus has been a reliable safe haven and a source of financial and political support over the years.
Whether any of this is true matters less than whether the Syrian public believes it to be true. The Assad regime’s deadly response to what up to now has been a relatively mild provocation suggests that officials in Damascus are seeking to reinforce the notion that the cost of a concerted effort to remove the Baath Party from power would be extremely high. And despite the evident signs of discontent among the Syrian population, it is probable that the vast majority of Syrians will decide that the potential benefits are not worth the cost.
In that regard, the international community has not exactly been encouraging. Although leading NATO members have extended military support to the anti-Qaddafi movement in Libya, there is little to suggest that anyone with the power to influence events is interested in pursuing a similar course in Syria. Indeed, despite the mounting death toll from the crackdown on protests, US Secretary of State Hillary Clinton has expressed confidence that Assad is at heart a “reformer,” and her public criticism of the Syrian leader has for the most part focused on her disappointment that he has failed to live up to that reputation.
Even if Assad manages to survive the current crisis with his own power and the monopoly of the Baath Party intact, as it is expected will be the case, the events that are reshaping the political landscape across North Africa and the Middle East will continue to cast a shadow for years to come. As recent developments have made clear, neither carrots nor sticks, no matter how attractive the former or intimidating the latter, can guarantee the position of a regime that holds power by means other than the freely granted consent of the governed.
But democratic reforms are simply out of the question in Syria, as moves in the direction of political pluralism would pose no less of a threat to the favored position of the Alawite minority than an armed revolution. Assad will undoubtedly hold out the promise of incremental reforms, and buy himself and his cronies some time. But the pledges of political liberalization will not be honored, and the disappointment will compound the sense of grievance among the population, resulting in the slow but steady buildup of tensions that cannot be contained indefinitely, particularly if something resembling authentic democracy begins to take root elsewhere in the region.
In short, the day of reckoning for Assad and the Baath Party may not come in 2011. And it may not come within the next five years. But it is coming, and when it does, there is every reason to expect that the transition will be traumatic.
Political Uncertainty Will Undermine Economic Program
The Syrian regime will attempt to delay that day of reckoning by focusing on the material needs of those it rules. In contrast to his record on political reform, Assad has introduced some significant liberal economic reforms, motivated in large part by his belief that a strong economy is the antidote for political discontent. The president has spoken with admiration of the Chinese model of development, and has suggested that dissatisfaction with his rule, to the extent that it exists, is an indication that the regime must do more to boost living standards.
That perspective is apparent in the government’s five-year economic plan for 2010–2015. The program envisions an acceleration of real GDP growth to an average of 5.7% per year, based on anticipated investment totaling $100 billion, of which about one-half is expected to come from the private sector. Among the key aims are reducing Syria’s dependence on exports of natural resources (oil, phosphates, and cotton) and strengthening the country’s regional economic role.
Prior to the recent crisis, Deputy Prime Minister for Economic Affairs Abdullah al-Dardari stated that the physical, legislative, and human resources infrastructure essential to creating an attractive climate for foreign investment would be fully in place when the current plan expires in 2015. However, it remains to be seen whether the government is willing to risk unleashing a popular backlash by pursuing the numerous unpopular reforms that would be required to achieve the broad targets outlined in the five-year plan. Indeed, it is unclear whether the government is prepared to stand firm behind the reforms that have already been introduced.
In January 2011, as the unrest in Tunisia grew into a full-fledged revolt, Assad’s government announced a 72% increase in the heating oil allowance for public-sector employees and retirees, partially reversing cuts in subsidies that were implemented in 2008. The increase in the heating oil allowance will benefit two million civil servants and pensioners, at a cost of $326 million per year. To offset the cost of the subsidies, the government proposed hiking the price of fuel oil sold to industrial users beginning in April 2011.
The fuel subsidy was granted in addition to a one-time bonus that was extended to public-sector workers even before the eruption of unrest in Tunisia, with an estimated price tag of $270 million. Both moves suggest that the government is losing its nerve as the effects of its cautious program of liberal economic reforms become apparent. In that regard, it is not insignificant that labor unions have increasingly voiced complaints about an erosion of living standards, a trend that they have directly attributed to liberal economic reforms.
It is conceivable that the more conservative members of the ruling party could seize on the threat posed by unrest across the region to bring the liberalization process to a halt. However, government officials recognize that reforms are necessary to create a solid foundation for long-term economic stability. As such, the government is expected to proceed, but it will continue to display its characteristic caution, ready to retreat if its measures provoke an unsettling public backlash.
But that is hardly the full extent of the dilemma facing the government. Even if the regime is prepared to proceed aggressively with the development program, heightened political uncertainty will influence the response of the foreign investors whose cooperation is essential to achieving the goals of the development plan. The decision of both Emirates Telecommunications and Turkcell to pass on an opportunity to bid for Syria’s third mobile telecommunications license points to a negative turn in foreign business sentiment that threatens to put the government’s investment target hopelessly out of reach.
Loss of Confidence Will Weaken Economy
Improved relations with its neighbors have benefited the Syrian economy in recent years, contributing to higher non-oil sector growth and rising numbers of foreign visitors. However, the government admits to only having been able to create 39,000 jobs last year, compared to an official target of 250,000–300,000, and severe and prolonged drought in the east of the country weakened agricultural output, holding real GDP growth to 3.2% in 2010.
A state-led capital investment program, financed with increased oil proceeds, will be a main driver of growth in 2011. The budget for the current year includes total planned spending of $17.8 billion, fully 45% of which has been earmarked for investment projects, including the construction of a power plant in the eastern province of Deir Ez Zor, the expansion of the Tishreen power station, and two hydro-power projects. However, the outlook for other sectors of the economy has dimmed in the wake of the unrest, creating the possibility that the government will need to reconsider its investment plans.
Just two weeks after the first significant protests erupted in mid-March, numerous worrying signs were already apparent. The volume of trading on the small Damascus stock exchange was down by one-half, Syrians have rushed to exchange pounds for dollars, and there is anecdotal evidence suggesting that households are restricting expenditures to the bare essentials.
Central bank officials have downplayed the risks, noting that an ample supply of foreign exchange reserves, currently amounting to more than one year of import cover, provide insurance against damaging currency volatility. However, the tourism sector, which accounted for about 12% of GDP and more than 10% of employment in 2010, and is an important source of hard currency, is anticipating a significant fall-off in foreign visitors that will persist as long as the threat of political violence persists.
Political uncertainty will also discourage investment by domestic businesses, creating the danger of an increase in unemployment that would reinforce any decline in consumer spending. Finally, serious water shortages, the result of both drought conditions and decades of poor management, will continue to weigh on agricultural production. Assuming there is no rapid resolution of the current political crisis, real GDP growth will be held to just 3.4% in 2011, and the downside risks to the forecast are substantial.
A sharp rise in the cost of food and beverages pushed the monthly inflation rate above 6% (year-on-year) in December 2010, lifting the yearly average to 4.5%. The government’s attempt to cap domestic food prices has failed to make an impact, as many retailers have reportedly taken to hoarding non-perishable items. Strong upward pressure on prices will persist over the coming year, as global prices for food remain at or above the current record highs, resulting in an increase in the annual inflation rate to 7.4% in 2011.
High oil prices and increased output will boost exports in 2011, but the positive effect on the trade balance will be limited by the rising cost of imports of refined fuel. Weak productivity and pest-related problems will constrain the growth of agricultural exports. Sharply higher global prices for food and public-sector demand for project-related capital goods will boost the imports bill, but the increase in the trade deficit will be constrained by a weakening of demand for other imports. A larger trade deficit and a smaller services surplus, a reflection of the negative impact of domestic unrest on tourism revenues, will widen the current account deficit to $2.3 billion, equivalent to about 3.8% of GDP.