Analysis: The Pitfalls of the Free Market Approach (Open access)

When discussing the economic model suitable for post-Assad Syria, the new Syrian authorities seem to have a clear-cut script: the country will embrace a free-market approach opening the door to private investors and getting rid of the socialist approach adopted in the 54 years of Assad regime rule.

For instance, caretaker president Ahmad Al-Sharaa said that Syria suffered from socialist economic policies; the Minister of Domestic Trade said that Syria intended to implement a “free market” economic model; and the Minister of Foreign Affairs told the World Economic Forum in Davos that Syria would follow the economic development models of Singapore and Saudi Arabia. These statements are largely disconnected from reality, though.

Describing Syria’s economy as socialist, for instance, is deceitful: Bashar Al-Assad’s Syria economic system was a case study of crony-capitalism.

It is unclear if the caretaker authorities’ statements are just music to foreign investors’ ears, part of their efforts to dismantle the regime’s legacy, or if it is truly their economic agenda. It is worth noting, for example, that despite their statements to adopt a free market economy, the caretaker government has taken several decisions signalling it understands the risks of adopting a pure free market approach, including maintaining some subsidies and vowing to prioritise public hospitals.

The urban legend of socialist Syria

Following the economic liberalisation of the 2000s, Syria’s economy has been largely dominated by private investors. Except for the energy and financial sectors, all the main business sectors have been overwhelmingly controlled by the private sector: agriculture, manufacturing, construction, wholesale and retail trade, tourism, domestic transportation, etc.

Even in the energy sector, most oil and gas extraction was done through joint ventures with foreign private sector firms. By 2010, Damascus had already allowed private investment within the electricity sector.

In the financial sector, the public sector’s presence remained important, but in 2009 the Damascus Securities Exchange opened its doors, and more than three dozen financial firms with foreign capital operated in the banking, insurance and brokerage industry.

In the years preceding the uprising, the government was even increasingly ceding control of key infrastructure to the private sector, for instance, to manage its two commercial ports, and was looking for private sector investors to build two strategic motorways (which never materialised), the first linking Syria’s southern and northern borders, and the other linking Syria’s western and eastern borders.

In 2010, the size of the state’s budget stood at around 27 percent of GDP, the same ratio as Jordan, a country that nobody would describe as a socialist economy.

Private actors also played a role in the healthcare sector. In fact, private and public hospitals have coexisted since the 1970s. In the early 2000s, the Assad regime allowed public hospitals to charge reduced fees for some of their beds, and last year, the regime was touting the idea of further privatising the healthcare sector on the grounds that it was unsustainable. In 2022, the bed capacity of public hospitals stood at 21,681 compared to 11,555 in private hospitals.

Of course, the state remained present in many ways, for example, by arbitrarily setting ceiling prices for some key products, such as medicines. However, this price control strategy helped ensure affordable medicines to the population and did not prevent private sector pharmaceutical companies from flourishing. Syria covered an overwhelming share of its needs in medicines thanks to dozens of private sector companies.

The government did subsidise wheat production, bread, electricity, and gas and fuel oil, among other products. And, in 2014, it introduced the Smart Card, a system that allowed Syrians to purchase a set quantity of subsidised goods at authorised retailers.

However, in the last two decades, these subsidies were gradually reduced. The decrease in the support for fertilisers and gas oil in the years preceding the uprising was actually a main factor behind the decline in agricultural production, much more so than droughts. In 2022, the Assad regime was discussing the restructuring of the subsidy system, and in January 2023, Damascus announced a plan to shift towards direct cash handouts instead of subsidising items.

Role models

To consider Singapore and Saudi Arabia as inspiring economic models is also questionable. Syria has none of the resources or characteristics that enabled these two countries to develop their economies and is neither a city state, nor a large oil producer.  

The logic behind all these statements from Syrian officials seems to be a combination of neo-liberal ideology, an attempt to attract much needed foreign investments, and a complete rejection of everything the former Syrian regime nominally stood for – even if in practice it did the opposite of what it said.

Those advocating for the benefits of adopting an economic model purely based on the laws of supply and demand with minimal government intervention seem to be overlooking the pitfalls of the 2008 global financial crisis, and the inherent dynamics of the Syrian economy. Many members of the new Syrian authorities or those advising them had no role in Syria’s economic planning and decision-making processes before 2011.

Suggestions that Syria should follow an economic model where the role of the state is restricted to providing social services (education and health primarily) while it leaves all the rest to the private sector, do not help. Many developed economies apply protectionist measures and subsidies to both producers and consumers without anyone contesting the “free market” nature of their economic model. 

The agricultural sector is a good example. The European Union in its 2021-2027 budget, dedicates EUR 378.5 billion for the Common Agricultural Policy, ensuring fair income support for farmers. If Syrian farmers were to see a complete halt of subsidies for key agricultural inputs, agricultural production would collapse, food prices would surge, and rural-urban migration would increase significantly.

Syria’s economic capabilities are in tatters after five decades of crony capitalism, 13 years of conflict, and the impact of Western sanctions. With barely four hours of electricity supply per day, large destruction of infrastructure, lack of skilled labour, and an unstable local currency, local manufacturers, farmers and traders do not stand a chance against global markets if the “liberalisation” of the economy translates into a complete halt of protectionist measures and subsidy programmes.

With 90 percent of the population below the poverty line, if the government lets the laws of supply and demand dictate the prices of bread, medicines or cooking gas, most Syrians would not be able to afford them.

Despite the headline-grabbing statements announcing an embrace of the free market and the end of a socialist era, on the ground, the caretaker government seems to understand the risks of a complete liberalisation.

For instance, despite a plan to halt bread subsidies, so far subsidies have been reduced (thus the price of a bread pack surged from SYP 400 to 4,000), but not entirely removed.

The caretaker minister of electricity told us that he would not be able to raise electricity prices until salaries improved. And an official at the Ministry of Health explained their plan is to first support public hospitals, given that only a few Syrians can afford the exorbitant prices of private hospitals.

What now

Much needs to be rethought about Syria’s past economic policies. Subsidies, particularly for the energy sector, generated massive losses and smuggling to neighbouring countries. Bureaucracy and corruption were a significant obstacle to private investment. The fact that the state should own factories producing, for instance, biscuits or clothes, needs to be seriously questioned.

However, rather than spending time showing the world that they can be as liberal as possible in their policy choices, the new Syrian authorities should focus on one long-term priority: increase domestic production in all business sectors.

Only by increasing economic output will there be enough revenue to raise fiscal income, which will help fund further investment and improve social wellbeing. All policies, whether they are fiscal, trade or monetary should be geared towards that objective.

This involves more investment by local, expatriate and foreign investors, but also by the state. Indeed, in the current political and business environment no one other than the state will be available to invest in infrastructure at affordable costs, or to support strategic sectors such as agriculture. Except for situations where foreign investors provide a real added value, in terms of engineering for example, foreign investment in infrastructure should be limited; otherwise, the costs to consumers will be unbearable.

Supporting local production will involve, for instance, imposing some tariffs on consumer goods, to provide a minimal level of protection relative to foreign competitors and generate fiscal revenue, but also competitive production inputs through lower tariffs on inputs and low energy costs. It will also mean continuing putting money into agriculture: more agricultural production means lower prices for the consumers, better economic conditions in rural areas and hence less rural-urban migration.

Investing in infrastructure and protecting to some extent local producers from foreign competition will provide some breathing space to local companies.

The government also needs to perform a balancing act between opening the country for much needed investment, and protecting Syria’s natural resources that are an easy prey for vulture capitalist actors that may take advantage of the devastated state of the economy.

Getting rid of corrupt practices, red tape, favouritism practices are positive steps towards improving the business environment for investors. The caretaker authorities are in the process of expropriating the stakes that regime cronies have in a vast network of companies, although they have to be careful that Assad cronies are not replaced by Hayat Tahrir Al-Sham (HTS) cronies. 

Finally, while the government is announcing a flurry of decisions, and appointing people at institutions at a fast pace, it must be careful that its role as caretaker government is to keep things running, and that it does not have the legitimacy to govern as if they were elected officials.