The Economic Liberalization Movements in Egypt and Syria - Term Paper Example

Introduction The Middle East has always been a region of interest for foreign investors because of the large amounts of resources that are available in the area. Egypt is a country that was previously an isolationist nation where nearly everything was state controlled, but it has recently moved away from these policies in order to spark interest in foreign investment in the country. By allowing for things to become privatised, Egypt has opened up its borders for international investment, which will be a positive for the country in the future because it will expose its population to new opportunities. Egypt now enjoys a trade relationship with the United States that has made the country important to the international trade community and this importance has improved life within the country as well. Syria, however, is very new to liberalization. When the Ba’ath Party was in power, the elites held nearly all of the economic power because of their relationship with the government and these elites have been very reluctant to give this power up. This has led to high taxes for other sector, which has led to many businesses going underground. The Syrian government appears to be committed to developing a liberalized economy, but it has been statist for so long that this process will take some time. Also, the current regime in Syria does not wish to lose the support of the elites, so they must be very tactful when implementing new economic policies. Egypt has done a much better job than Syria at liberalizing its economy because its government has been much faster at retreating from its previous policies and allowing for sectors to become privatised and “Turkey, Egypt, and possibly Tunisia are probably more likely to succeed in privatization than Syria, Iraq or possibly Somalia“.1 Egypt’s American Dependence In 1974, the Open Door Policy was created between the United States and Egypt and this policy essentially said that the United States would give Egypt a large amount of financial aid. Since Egypt was a major economic power in the region, this planned was deemed as necessary for peace in the Middle East, since the United States wanted to have diplomatic relations with the more powerful countries. This was also done to lessen the Soviet influence in the area, as this occurred during the Cold War. After the Camp David Accord in 1979, Egypt began to harvest $2 billion per year in American aid. The following is a table of how the aid was broken down over the years: Table 1: Composition of U.S. Foreign Aid to Egypt (in millions)2 Aid Type 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 Military 1500 550 1325 1175 1300 1300 1300 1300 1300 1300 Economic 835 829 750 1315 815 815 780 747 1113 815 Food 253 301 255 227 196 152 218 4 0 0 This aid, however, was in such large sums that it was impossible for Egypt to utilize properly, as it was based on political objectives rather than the actual needs of the country. For the United States, Egypt’s economic viability was not even a concern, as it only wished to keep the Egyptian government on its side during any conflict in the region. In the past, Egypt had led every war against the state of Israel in the region by supplying the most troops and weapons, so the United States hoped that this money would keep Egypt neutral in any future disputes in the region. This money also gave the United States access to deploying military personnel from Egypt, which was used strategically in any wars in the area. The political impact of this aid went even further than the military, however, as the money was used to increase the standard of living in Egypt. What this did was lessen the impact of Islamic fundamentalism in Egypt and, therefore, in neighbouring countries also. Basically, the United States wished to make sure the Egyptian population was happy because they believed that this attitude would spill over into other regions of the Middle East and would eventually lessen the impact of any fundamentalist groups that could possibly inflict harm on American interests in the Middle East. Liberalization Economic liberalization in Egypt relied heavily on the government allowing more to happen economically within the country. The United States could not keep aiding the country with so much money, so something had to be done to improve the country from within. This happened in the form of foreign investment in the country. In the past, the majority of Arab countries had a closed door policy to foreign investment; particularly Western investment. The aid that had been given to Egypt by the United States was not doing much for the overall viability of the economy because it was not being used properly. Egypt needed economic reforms, because it was a statist economy, in order to effectively improve its overall economy. The plan that the United States came up with to change all of this was to begin trading with Egypt, rather than simply supplying it with aid, which would then increase the amount of foreign investment within the country and would liberalize it. At the end of the Cold War, the United States began to increase its use of trade as a form of investing in countries, since it no longer had to worry about these countries joining the communist side of the dispute. This new plan included expanding free trade agreements, increasing the prominence of the Commerce Department’s Foreign and Commercial Service office to promote American exports, creating the National Export Strategy to aid private American corporation to complete internationally, creating the Advocacy Center to aid private American businesses resolve international disputes with other governments, and creating the National Economic Council in the White House to help out with the National Security Council. What the American government did in order to promote the liberalization of the American economy was to increase the trade between the two countries by promoting the investment of American corporations in the country. This was seen as a form of economic cooperation between the two countries, rather than the dependency that had once been major in their relationship. The goal of this was to make Egypt open for international business, which they believed would make the country economically stronger in the future, while continuing to further the interests of American corporations in the region. This new partnership “consisted of various committees in charge of promoting private sector development. The committees included Economic Policy, Trade, Investment, and External Finance; Technology; Sustainable Development and the Environment; and Education and Human Resource Development. Some of the activities of the committee on Economic Policy, for example, involved providing technical advice on privatisation, WTO rules, intellectual property right protection, improving Egyptian capital markets, establishing government securities, improving sales tax rules and agricultural price liberalization”.3 The Presidents’ Council was made up of a group of American and Egyptian businesses and was aimed at furthering the trade partnership between the two countries. This council had a great influence on the trade relationship between the two countries and worked towards an actual trade agreement. In 1998, “Vice President Gore announced the new Trade and Investment Framework Agreement (TIFA), which extended the scope of the 1994 U.S.-Egyptian Partnership for Economic Growth and Development. U.S. Trade Representative Charlene Barshefsky highlighted that ‘entering into a TIFA with Egypt marked the first step toward creating freer trade between our two countries, and established the basis for stronger economic ties to bolster our joint efforts at further peace in the region’”4 The agreement between the United States and Egypt has gone a long way in promoting the liberalization and, therefore, the economic growth of Egypt. The country has gone from simply receiving aid form the United States to becoming a full time trade partner, which makes the partnership viable for both countries. This has been done because of the retreat of state in Egypt. They are allowing the private sector to have an increased role in the economy, which has led to a significant amount of growth within the private sector. Through things like currency devaluation, increased privatisation, trade liberalization, better fiscal management, and increased foreign investment, the country has been able to shed some of its statist policies, which has allowed for it to move past its history of government intervention and into a more liberalized economy. It can be said that “the age of privatization might have arrived at last in Egypt, and the government has announced the names of dozens of large companies that have been designated for sale”.5 Syria’s Past Syria has also traditionally had a statist economic system, which has created an environment where there are winners and losers financially. When the Ba’ath Party took power of the country in 1963, they nationalized industries, established state-run retail and marketing networks, fixed prices, and created a state-run monopoly of foreign and wholesale trade. In the decades following this, the Syrian government split the country into fourth distinct, but partially overlapping constituencies, with each of these having a certain amount of input into state affairs. The first is a group of senior military officers and Sunni merchants who have been partnered with the state. These people have used their influence to gain mass amounts of wealth for themselves and, therefore, they have come to dominant the private business sector in the country. This group does not wish to see any economic reforms within the country because it is thriving under the current system. The second group is the Alawite community, which constitutes about 12% of the country’s population. Throughout history, the Alawite’s living conditions have been poor in comparison to the Sunni majority, but this has changed over the past thirty years. The third group is made up of workers and professionals that work in the public sector. About 40% of the national workforce falls under this category, which makes it a very significant demographic. The fourth group in the rural peasants and they rely heavily on the state for subsidies and input. These peasants have the least to lose from economic liberalization, while those in the first group have the most to lose because a new system would equalize things. Those who work in the public sector would not see any immediate results, but they could, over time, see some changes, since their wages have been decreasing over the past two decades. Liberalization of Syria When Bashar Assad because President of Syria, he “inherited control over one of the poorest countries in the Middle East (per capita GNP being a mere $1010 in 1999), saddled by one of the highest rates of annual population growth in the region (2.7%), negative economic growth (-1.7% in 1999), skyrocketing unemployment (estimated at 20%), a negative balance of trade, and dwindling oil reserves (2.5 billion barrels). That the Syrian economy was in dire need of sweeping reforms was widely acknowledged even in the state-run press”.6 This is because “what the private sector has to offer in comparison with Syrias public sector is greater efficiency and profitability, work incentives (performance-related financial and career rewards), better training and better pay”.7 Syria is a country that wishes to liberalize its economy, but it will be very difficult to do after it has been under a statist system for so long. Also, because “absolute primacy has been given to national and regime security, the recognition of the particular risks that economic liberalization may entail will corroborate the inclination of the regime to steer such a process according to its own schedule”.8 Politically, Syria is an important country in the Middle East, but it has yet to implement any significant economic partnerships with other countries in the international community. One of the major concerns in this country is the amount of power that the elites gave had over the years. When the Ba’ath Party was in power, the elites were except from many taxations and this is something that the current regime is attempting to change. They are currently discussing with the elites on a way for their corporations to become shareholding companies that reveal their true incomes so that they would be taxes accordingly. This plan would “involve scrapping high taxes from the central planning era that forced a large part of the economy underground and new laws to value companies and encourage them to list on the Damascus bourse, which is expected to resume trading by August after a break of five decades”.9 In 2007, Syria is faced with an oil import bill of $2.7 billion, American economic sanctions, and a 12-20 percent unemployment rate. Under these pressures, the government has begun to make laws that favour the corporate world without making any fundamental changes to the public sector. This means that the government aims to move towards liberalization slowly and careful, in order to avoid backlash from any of the social groups within the country. With this method, the government hopes to keep everyone happy, while still allowing the marketplace to be changed in the long run. The economy became very nationalized when the Ba’ath Party was in power. President Assad, however, has begun to slowly allow for banking and insurance sectors to become open to private investment and more privatised firms are expected to appear as time goes by. The old way of doing things in Syria was with a policy of isolationism, which was implemented in hopes of making the country less vulnerable to international economic pressures. People who support this old way of doing things believe that growth can come from within the country, as they think that without outside economic pressure, the country will be able to flourish significantly. Businessmen within the country, however, believe that the government made a huge mistake, as Syrian businesses are currently well behind their international counterparts and, therefore, they have a long way to go before they are competitive. An example of this is that a 40 million Euro loan by the European Investment Bank to help small and medium businesses expands has not been used by the country because there is no accounting standard in the country. This means that they do not know how to properly utilize these finances so they are, in effect, wasted. Certain businessmen in Syria believe that the entire legal system will need an overhaul in order for thing to be successful, as there is no legal framework to resolve disputes between business partners, which discourages the borrowing and lending of money because of the risk involved. The country needs a department to oversee these types of transactions, in order to provide protection for each side. Another major problem in the liberalization of Syria is that high taxes have caused the black market to become a very popular place for business owners. Rather than registering their companies, paying taxes, and receiving nothing in return, companies will simply avoid the government and keep all of the profits for themselves. This problem is once again the result of the elites receiving all of the benefits. Since they are able to get around taxes, the tax money from the lower end businesses is all that is needed in order to keep the country afloat. The problem is that these companies do not receive benefits from this tax money, as there are industrialized cities in the country that do not have electricity or a sewage system. Private investment has begun to make an impact in Syria, but it has not happened in a significant enough amount in order to make a major different and to consider the country liberalized. Conclusion The liberalization movements in Egypt and Syria are currently at different stages and, therefore, have had different effects on the economies of those countries. Both of these countries had statist economic policies that discouraged foreign investment and made it very difficult for the countries to develop economically. Egypt has since moved past these policies and become an increasingly important player in international trade, particularly with the United States. Syria, on the other hand, has had difficultly moving past the dominance that the elites have had in the country for decades and is, therefore, behind the times as far as economic expansion goes. Egypt has undertaken a foreign policy that will help both domestic and foreign companies to expand within the country, which will go a long way in creating additional trade agreements that will further liberalize the country. Syria, on the other hand, has not had as much success because a small percentage of the population holds a high percentage of the wealth and political power and these elites do not wish to see any major economic reforms occur. At the same time, however, change has begun in the country, so the new regime is actively attempting to revive the economy allowing for things to become privatised. Works Cited Gambill, Gary C. (July 2001). "The Political Obstacles to Economic Reform in Syria". Middle East Intelligence Bulletin. Vol. 3. No. 7. retrieved 20 February 2007. http://www.meib.org/articles/0107_s1.htm Handoussa, Heba. (1997). Economic Transition in the Middle East: Global Challenges & Adjustment Strategies. Cairo: American University in Cairo Press. Kienle, Eberhard. (1994). Contemporary Syria: Liberalization between Cold War and Cold Peace. London: British Academic Press. Momani, Bessma. (September 2003). "Promoting Economic Liberalization in Egypt: From U.S. Foreign Aid to Trade and Investment". Middle East Review of International Affairs. Vol. 7. No. 3. PP. 88-101. Owesis, Khaled Yacoub. (2 February 2007). "High-powered debate shows Syrias economic problems". Reuters. retrieved 20 February 2007. http://today.reuters.com/news/articlenews.aspx?type=inDepthNews&storyID=2007-02-02T073500Z_01_L01919975_RTRUKOC_0_US-SYRIA-ECONOMY.xml&pageNumber=0&imageid=&cap=&sz=13&WTModLoc=NewsArt-C1-ArticlePage3. Perthes, Volker. (1995). The Political Economy of Syria Under Asad. London: I.B. Tauris & Co. Ltd. Read More