Syrians Hope Peace Will Transform Economy

President Assad, eager to protect jobs in huge state-run sector, may move slowly on his pledge to shift toward freer markets

PIERRE ABBOUD sits among a dazzling array of silver daggers, inlaid wooden backgammon sets, and opal jewelry. From his handicraft shop in Damascus's Old City, he has watched in hope as Syria resumed its peace talks with Israel.

"We're all waiting for an agreement," he says. "Everyone working in this market wants the government to make peace so the tourists will come back. Peace can only be good for business."

For decades, Syria cut itself off from the West through its close alliance with the Soviet Union and its 30-year fight with Israel. But in 1991, the Soviet Union collapsed and Syria agreed to participate in the Mideast peace process.

Now, as Syria seeks a "land for peace" deal that would return the Israeli-captured Golan Heights, Western firms are creeping in. Adidas and Benetton are already here, and others are interested.

But the reality of peace will not be easy for Syria.

Although many ordinary Syrians talk hopefully of a "peace dividend" - millions of dollars freed for investment in transport, industry, and education - it is unlikely that the government will immediately slash its military budget, which accounts for some 60 percent of gross domestic product.

"I don't think the peace will lead to a reduction in military spending at first," says Nabil Sukkar, director of the Syrian Consulting Bureau, an independent consultancy. "Israel's Army is far better equipped and will remain so as long as the United States continues its policy of supporting Israel."

Business leaders are anxious about the consequences of peace. For decades a client state of the Soviet Union, Syria has cushioned itself from the world with nationalized industries, government-guaranteed prices, and high tariff barriers. A peace deal would perhaps allow Israelis and others to compete with Syrian manufacturers in their own market. Pessimists worry the country could become simply a source of cheap labor servicing Israel's economy.

Moreover, Syria's lack of a money market is stifling business development, officials at the Damascus chamber of commerce complain.

"We need debt markets and capital markets, but there is still a hesitancy here about turning too much to the right," says Rateb Shallah, the chamber's president.

At present, banks in Syria are nationalized and loath to extend financing to entrepreneurs unconnected with the regime. Even the simplest loan can take months to arrange, say Syrian businessmen; new ventures are started with money raised from family and friends.

Syrian entrepreneurs cite an array of obstacles that will prevent them from competing with Israel: an export tax, the critical shortage of credit facilities, a corrupt and sluggish bureaucracy, and the continued existence of Law 24, which imposes up to 25 years in prison for wrongful possession of foreign exchange.

"We cannot compete with one hand tied behind our backs," complains one prominent Damascus entrepreneur.

Foreign observers also point to a catastrophic lack of management expertise within state-run enterprises and the civil service.

President Hafez al-Assad has hinted that he will give more attention to economic reform once the "battle for peace" is won. The strong-handed leader's attention is vital, for even cabinet ministers are reluctant to take responsibility for policy within their own ministries.

The Soviet-inspired ministers fret that chaos would accompany a rush toward privatization and free enterprise. Mr. Assad, determined to protect the hundreds of thousands of Syrians employed by inefficient state-run enterprises - and his own hold on power - prefers to manage a slow transition to freer markets rather than let the markets take care of themselves.

The government has been slowly reforming the centrally planned economy since the loss of its main benefactor, the Soviet Union. Investment Law 10, passed with much fanfare in 1991, opened the door to a $5.6 billion flood of investment from Syrian expatriates and the wealthy aristocratic families of Damascus and Aleppo. But subsequent private enterprise has been largely limited to retail and tourism.

In the short term, analysts say, the country will be held together by oil exports worth $2 billion a year, nearly 60 percent of total export earnings. But Syria's oil wells are set to run dry within eight years, and onerous concession agreements give foreign oil companies little incentive for further exploration. To avoid a balance-of-payments crisis, Syria must develop other exports.

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