THE REFORMER EMERGING?

C O N F I D E N T I A L SECTION 01 OF 03 DAMASCUS 005284

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E.O. 12958: DECL: 10/30/2016
TAGS: ECON EFIN PGOV PREL SY
SUBJECT: THE REFORMER EMERGING?

REF: A. DAMASCUS 1926

B. 05 DAMASCUS 5909

C. DAMASCUS 1979

D. DAMASCUS 5061

E. DAMASCUS 1696

Classified By: CDA Michael H. Corbin for reasons 1.5 b/d


1. (C) Summary. After having kept a lower profile for most
of the summer, Deputy Prime Minister for Economic Affairs,
Abdullah Dardari, reemerged recently to announce a number of
new economic reforms. The initiatives are part of the
SARG,s slow and halting effort at reforming its moribund
economy. Independent economists criticize the SARG effort to
date as far too modest to address the country's looming
economy challenges. Dardari,s uneven political career --
marked alternately by periods of inactivity (and criticism)
and bursts of high-profile initiatives -- casts interesting
light on the notion of Bashar al-Asad as economic reformer.
Dardari's -- and Asad's -- inability to launch a more
ambitious economic reform program is due to several factors,
including the large number of recalcitrant stakeholders in
the existing, corruption-ridden system, Asad's mixed motives
in supporting economic reform, and his lack of steady
leadership on the issue. End summary.

Dardari Reemerges
--------------

2. (C) In September, Deputy Prime Minister Dardari reemerged
after a period of relative obscurity. Like other periods
when his profile was similarly lowered (ref B),Dardari,s
lack of public appearances preceding that re-emergence, gave
rise to speculation that his demise was imminent.
Damascus,s chattering classes also talked about Dardari,s
own profound frustration over his inability to implement his
reform agenda and his subsequent desire to leave government.


3. (C) Also similar to the previous pattern, Dardari,s
reemergence coincided with an up-tick in new economic
reforms. The pattern seemingly reaffirms Dardari,s role as
the SARG,s economic reform salesman (ref B). In addition to
being adept at managing a media message, as a non- Baathist
who has lived and worked in the West, Dardari is also the
face of reform for the international donor community. The
head of a recent European Commission delegation, Alan
Seatter, attributed Dardari,s success thus far to his
bureaucratic infighting skills and his understanding of his
limitations.

New Reforms
--------------

4. (U) Dardari,s set of recent reforms consists of a law
implementing a Syrian stock market (ref D),the first license
for a private currency exchange office (still pending),the
third lowering of the corporate tax rate since Asad assumed
power in 2000, and the removal of state-owned enterprises
(SOE) from under the Ministry of Finance. Dardari also
promised a set of new additional laws before the end of the
year including: anti-dumping, consumer protection, a new NGO
law, real estate, investment, and a law providing the Central
Bank with its first monetary tool ) treasury bills. Taken
together, the announcements give the impression Syria,s
incremental and often halting pace of economic reform has
recently picked up momentum.


5. (C) The reality is more complicated, as the reforms
listed above are for the most part neither new nor dramatic.
They are, however, part of the SARG,s slow path to economic
liberalization. As Samer Akkad, scion of one of the leading
Sunni business families in Damascus, described reform under
Asad to us recently, &compared to the Syria of 20 years ago,
the economy has opened, but at such a slow pace that Syria
continues to fall further and further behind its neighbors.8


The Reform Scorecard
--------------

6. (C) Independent economists are uniform in their criticism
of the SARG reform effort as lacking much substance. Nabil
Sukkar, director of a leading consulting firm and former
World Bank economist, commented to us that the SARG,s
reforms have yet to touch the country,s structural
imbalances. According to Sukkar, Syria faces two looming

DAMASCUS 00005284 002 OF 003


medium-term economic challenges: consistently producing fewer
jobs than the 200,000 new entrants each year and the country
crossing over from being an oil exporter to being a net
importer of oil and derivatives, sometime around 2010. Both
require wide-sweeping reforms to reverse the current trend,
according to Sukkar. Oil is central to the economy with an
estimated 70 percent of the country,s exports and over 30
percent of government revenue coming from it. To prepare for
the crossover, economists like Sukkar argue that the SARG
must diversify both its export and tax base. On burgeoning
unemployment, Sukkar estimates Syria currently produces
enough jobs for only 50 percent of its college graduates.


7. (C) Another Syrian economist of international stature and
advisor to the SARG, Samir Seifan, listed a number of key
reforms that would have to be part of any formal plan if the
SARG were to be successful in stopping its chronic economic
problems from becoming acute in the next three to five years:
a formal economic reform plan with benchmarks and milestones,
reforming the bloated and corrupt public sector,
rationalizing the ballooning costs of the country's subsidies
(ref E),and addressing both high-level and systemic
corruption.

The Pace of Reform
--------------

8. (C) Even pro-regime voices concede that the pace of
reform is too slow. Currently the economy is enjoying very
modest growth: 2.9 percent real GDP growth in 2006 according
to the IMF, but its structure is weak and will remain
vulnerable to external shocks - like a drop in oil prices or
a deepening of the country's international isolation - until
reform has both form and structure. Abdel Kader Husrieh,
author of most economic reform legislation and an informal
advisor to Deputy PM Dardari, commented to us that economic
reform at its current pace would not reverse the country,s
economic decline until his children's generation, at best.
In an increasingly global economy, reformers like Husrieh
worry about Syria being able to keep up.

Obstacles to Reform
--------------

9. (C) If skeptics of the regime's reform efforts are
correct and the pace and scope of economic reform is too slow
and too haphazard to make a significant economic difference
anytime soon, the question is, why? To start with, Syria is
full of opponents of reform. Bader Shallah, son of the
president of Syria,s Chambers of Commerce, commented to us
that one of the biggest obstacles to progress is that the
large majority of Syrians feel they have a stake in the
current system. In addition to the members of the Baath
Party and the security services, who arguably would be the
biggest losers under any structural adjustment, the 30
percent of Syrians who work for the SARG also jealously guard
their positions, with many of them focused on continued
access to low-level graft. (Comment: They would represent a
huge disgruntled class if they lost their jobs because of an
economic reform program that reduced bloated public sector
employment and cut off subsidies to state-run enterprises.
End comment.)

Asad as Frustrated Reformer . . .
--------------

10. (C) In spite of the slow pace and lack of a coherent
plan for reform, conventional wisdom in Damascus, both among
Syrians and the diplomatic community, is that in his
heart-of-hearts, Asad is an economic reformer and has a
vision to bring change to the country. Basel Nasri,
President of the Syrian Young Entrepreneurs Association,
commented to us that his exposure to Asad convinces him that
it is only the security services and Baath party structures
that stop Asad from transforming the country. Nasri and
others like him, who are active in Syria,s nascent NGO
community, believe that Asad is following a &China Model8
of reform: gradual economic liberalization as a platform for
political change in the relatively distant future.
Moussallam Droubi, a physician and leading businessman whose
association with Asad goes back to their time in London,
commented to us that even at that time Asad talked about how
Syria would have to change to remain relevant in the 21st
century.

. . . Or Cynical Operator

DAMASCUS 00005284 003 OF 003


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11. (C) The popular picture of Asad as the frustrated
reformer leaves his critics, as well as his supporters,
wondering why he hasn't done more on the issues he could most
easily affect if he is truly committed to reform. Some
observers point to Asad's penchant for appointing economic
advisors with starkly different visions of economic reform
(and with personal antipathies for each other) as evidence of
Asad's lack of seriousness about reform. As economist Seifan
has pointed out to us, if Asad were serious about making
progress, "why did he pick men for the two key positions )
deputy prime minister for economic affairs and minister of
finance ) who had a deep and abiding hatred of one another?"



12. (C) Some of the most profound skeptics of Asad's
commitment to reform insist that it is merely a cynical cover
used to justify family corruption, which in their view has
increased under Bashar al-Asad. The argument of these
skeptics is that Asad and a few cronies like Rami Makhlouf
are merely using reform as a lever to pry loose long-held
business assets or opportunities from competitors. (Note:
Ironically, Makhlouf insists that he is one of Syria,s most
important reformers because of his central role in opening up
key new sectors ) telecommunications with the new cell phone
providers SyriaTel and Areeba 94, and establishing Syria,s
first private banks. End note.) Other skeptics argue that
Asad uses reform cynically to reduce domestic or
international pressure. He is preoccupied with retaining
power, with reform only an afterthought.


13. (C) Comment: Dardari,s uneven track record, filled
with periods of inactivity and defensive reaction to public
and private sniping from his critics, and punctuated
occasionally with brief bursts of high-profile reform
initiatives, is emblematic of the fate of economic reform in
Syria under Bashar al-Asad. Dardari,s career casts
interesting reflections on the notion of Bashar al-Asad as
economic reformer. (Except for the brief period of Damascus
Spring at the beginning of his rule, Asad has shown no
serious commitment to the notion of political reform, with
the occasional announced measures, such as promises about a
new political parties, quietly abandoned or gutted of any
substance.) Without Asad,s support, Dardari would have had
no long-lasting political career as a reformer and would
likely have been shoved aside as Deputy PM for Economic
Affairs months ago, given his lack of any Ba,athist
credentials. While other economic reform advisors have been
dismissed or marginalized, Asad seems to recognize that his
claim to the mantle of economic reform leader in Syria is for
now dependent on providing Dardari with enough political
cover to protect him from his enemies inside the regime.


14. (C)Comment Continued: There is no doubt that Asad,s
motives in supporting Dardari and economic reform are
complicated and likely represent an unwholesome blend of
political cynicism, idealism, crony opportunism, nave faith
in haphazard steps of economic liberalization, and fears
about taking any economic decisions that might provoke
widespread economic distress and protests. Asad faces the
same legacy issues and economic challenges that face leaders
across the Arab world: How to deal with globalization and
the danger of losing out in the world economy while trying to
build on the legacy their fathers established in simpler
times. Asad certainly realizes the enormity of Syria's
economic mess and may sincerely want to reform economically.
However there are less positive explanations. Asad may well
simply seek to expand corrupt family and crony activities.
Cultivating a reputation for economic reform helps provide
legitimacy to a regime that lacks any compelling claim to
rule in Syria other than force. Finally, economic reform is a
proven enticement for quasi-political engagement by the
Europeans that could help Syria break out of its current
diplomatic isolation. We are likely to continue to witness
Asad,s (and Dardari,s) piecemeal, halting reform efforts,
showing limited signs of progress, but the true nature of
Asad's reform commitment will likely only be evident when the
SARG is forced to make major economic changes (such as when
oil revenues bottom out sometime around 2010).
CORBIN