The Middle East is doomed

Summary: Here is a grim forecast about the Middle East, looking at Syria as an example. Since America is so involved in the region, we might as well understand it.

“In 2009 I visited Syria for a week. I met a senior government official and Iman, both of whom spoke excellent English. I toured an aluminum factory as modern as anything in the world, owned by a Syrian-Canadian family with backing from Qatar. The employees I met spoke passable English and could explain the company’s strategy. I came away optimistic about Syria’s future. Then came the 2011 Arab Spring and the beginning of the Syrian Civil War.”

— Note from an informed observer of the Middle East.

“The Middle East is doomed.”

Tweets by Ehsani. Slightly edited for clarity. Visuals added.

The Mideast is doomed. Egypt alone needs to create 700,000 jobs EVERY SINGLE YEAR to absorb the new job seekers out its 98 million population. A third of this population already live below the poverty line (482 Egyptian Pound a month, which is less than $1 a day).

The seeds of the vicious circle that the Mideast region finds itself in today were planted at least 5 decades ago. Excessive public spending without matching revenues were the catalyst to a faulty and dangerous incentive system that helped to balloon populations beyond control.

A governance system that was ostensibly put in place to help the poor ended up being a built-in factory for poverty generation. Excessive subsidies helped misallocate resources and mask the true cost of living for households. Correlation between family size and income was lost.

Successive Mideast leaders are often referred to as evil dictators. I see them more as lousy economists and poor users of simple arithmetic and excel spreadsheets that can help demonstrate the simple, yet devastating power of compounding. Unless you are a Gulf-based monarchy enjoying the revenue stream from oil and gas that can postpone your day of reckoning, the numbers in nearly every single Arab country don’t add up.

Important to note that excessive population growth is not the issue here. Japan and many parts of Europe are suffering from too little population growth. The problem in Arab societies is lack of productivity stemming from weak private sector and overburdened bankrupt public sector.

As students of Economics know, “potential” economic growth of a country is derived by adding the growth rate of its labor force to the growth rate of the economy’s productivity {details here}. High labor force growth therefore ought to be a plus for the “Potential Growth”. The Arab World’s problem is that it suffers from shockingly low levels of “productivity”. This may seem like a fancy word but the concept encapsulates everything that Arab economies and societies suffer from.

Why does the Arab world have such low productivity? The answer lies in everything from excessive size of public sector, subsidies and overbearing regulatory system leading to corruption. As public sector liabilities grow, education, healthcare and infrastructure funding suffers.

Syrian demographics.

Why is the size of the public sector coupled with excessive subsidies the problem? Because what starts as the noble cause of helping the poor ends up masking the true costs of raising family size. Governments soon go broke. Services suffer. Anger rises. We know the drill now.

Average cost of raising a child until age 18 for a middle-income family in the U.S. is approximately $245,340 (or $304,480, adjusted for projected inflation). That is about $15,000 per child per year for a two-parent family with median annual income (college costs excluded).

Growing up in Syria, I can still recall the “Family Booklet”. The more dependents you had on that booklet, the more was your allocation of subsidized rice, sugar, tea, edible oil, etc. Your home electricity was also subsidized. So was your diesel. Schooling? Free all the way. Not only almost all your food staples and energy use was subsidized, the Syrian State used to give a prize (Nishan) to women who gave birth to 12 children or more. Syria at that time had about 6 million people (produced 300k oil barrels a day and had plenty of water).

Without having to pay full price for bread, sugar, electricity, tea, fuel or education (all the way to college) and with the State becoming by far the largest employer (job guaranteed), the Syrian population doubled every 22 years. Imagine the pressures on the State coffers. No need for much imagination about how Syrian State fared as its population doubled every 22 years while its oil reserves and production dropped by 50%. It was still expected to offer all those freebies to a populace that never once asked how the State was to pay for all this.

Not only Syrians never asked how their state could meet those obligations while they doubled every 22 years but the State itself never explained. It is debatable that the State was even aware of the power of compounding and what that does in the outer years (50 years ahead).

Government finances.

As State finances (revenue minus expenses with little to no borrowing program) suffered, so did the services. Schools, hospitals, municipal services became insufficiently funded. They were examples of Paul who had to be robbed to pay Peter (subsidies and losing public sector). As the state could not increase salaries with inflation, real wages and standards of living suffered. Even Mother Teresa would have had to accept a bribe if she had 5 kids and a salary of $150 a month. Corruption is an inevitable by-product of a broken system.

When the State can’t meet its built-in obligations, services suffer, and corruption is rampant. The public’s anger grows and fingers start to point at anyone and everyone that is getting a bigger slice of the cake that is not growing anywhere near number of mouths it needs to feed. In the end, governments that start off by offering more than they can sustainably afford in the long run, end up being criticized and even toppled for seemingly not providing enough to a population that grew beyond that capacity of the system to handle.

When governments spend, they can fund their expenditures in three ways.

• Collect taxes.
• borrow (assuming lenders are available),
• print money (assuming the central bank is not totally independent of the Government).

Without sustainable tax base, it’s unlikely lenders will be willing to fund governments unless the latter are asked to pay unsustainably high interest rates. Similarly, printing money will soon lead to debasing the currency and rampant inflation.

What about collecting taxes? Inscribed over the front door of the US tax office, (IRS) are the words “Taxes are what we pay for a civilised society.” As one once also said: “Countries that don’t have a properly observed tax regime usually fall into chaos and corruption”.

Growing up in Syria, avoiding taxes was akin to breathing. It had to be done. Often times, tax rates were impossibly high (top marginal rate was once over 70%). Not paying taxes is not just the fault of citizens but also Governments who need to accurately calibrate those rates.

Regardless of underlying factors behind poor tax collection, fact is that the Syrian Government was expected to provide services, run losing businesses (public sector) and offer generous subsidies without matching tax collection or borrowing. Something had to give: quality of services.

As spending increased with rise of the population, Government investment in schools, hospitals, roads, municipal services, civil servant salaries and human capital suffered and even froze. The public had the right to complain but the public didn’t want to know how Government was funding itself.

“When the children come, God will hand their fortunes along with them”.

This is what we grew up hearing from families whose income did not seem to support the number of children they had. People would laugh it off as a joke. Sadly, this was Syria’s ticking time bomb. On my trip to Syria few months ago, young gentleman at my hotel explained to me how he was finding it hard to resist the pressure from his extended family and friends to stop at 5 kids. His father had 11. His brothers had 8-9. Having only 5 himself was insulting to his manhood.

Peak fertility.

Like most Arab countries, Syria’s peak fertility (average number of children per woman) was between 1975-1980. The world’s highest then was Yemen at 8.7. Syria was 9th in the world at 7.47. It was in the company of Senegal, Malawi, Niger, Kenya, Rwanda, Afghanistan and Gaza. Even by 2005-2010, Syria’s population growth rate was still in the top 10 in the world at 3.26%. It also had one of the world’s youngest populations with a median age of only 15.4 years (only 4.8% was over the age of 60).These statistics are from UN’S World Population tables.

{See a list of total fertility rate by nation, high to low. Also see comparisons of then and now: 1950, 1960, and 1970.}

Egypt did embark on strong population control strategy. Over two decades and by early 2000, its population growth rate dropped from 3.5% to 1.7%. Large billboards were used in rural areas. An expanded use of contraception program was also effective. Sadly, success didn’t last. By 2007, complacency set in. Mubarak also started pushing back against international NGO’s administrating the programs. Once he was overthrown and Mursi came in, all contraceptions were banned. Before long, growth rate was back up to 2.55% taking country’s population near 100mm.

While Egypt tried its hand with family planning, Syria never did. This thread is not about merits or problems of population growth. It’s about fiscal pressures this dynamic inflicts on State budgets in a world of high subsidies, excessive public spending and limited resources.

Syrian Government was either not fully aware of the unfolding dynamic or that it was aware but it found it politically difficult to embark on a serious family planning program. Was the religious minority status of the leadership a factor and how would the religious establishment react?

Whatever the motivations or the excuses were, fact remains that no steps were taken to match the baked-in future population numbers with revenues or resources. Only way was to make cuts in Government investment, freeze public salaries and watch the quality of the services decline.

The golden years, followed by decline.

Many have blamed current Syrian Leadership for a long list of governance shortfalls. No one (included Assad himself) can claim otherwise. What this long thread tried to highlight is that at least empirically speaking, Bashar Assad inherited a near impossible situation.

Ironically, when Hafez Assad took over, he wrestled the Ba’ath party to the right as he fought off the more leftist wing that took power with him first. He immediately embarked on his “corrective movement”. I recall American cars being allowed as imports (yellow dodge taxis).

Older members of my family still refer to the period between 1970 and 1976 as Syria’s golden period. Merchants saw their businesses boom as foreign trade was relaxed and the corrective movement quickly became seen as a tilt to the right from an earlier ultra-leftist leaning.

Regardless of your politics, Hafez Assad was a larger than life figure in modern Syrian politics. Soon after taking over, he powered forward building a top down centralized State (Syria was part of Soviet camp during Cold War) that would come to dominate Syria’s future.

Merely 6 years after taking over, sporadic assassinations became widespread. Syrians would later find out their Government was at war with the Moslem Brotherhood culminating in Hama. This 6 year battle between Islamists and Damascus left its mark in Syria’s DNA ever since.

Having been near a death situation, Syrian Leadership abruptly reversed the trends from 1970-1976 when it opened the economy and relaxed international trade and moved almost the exact opposite direction. The old Eco corrective movement was frozen. Security reined supreme now.

{The Corrective Movement was a reform program in Syria led by General Hafez al-Assad after his coup d’état. See Wikipedia.}

Between 1982 and the year 2000 when Bashar took over, Syrian Leadership spent most of its energies making sure the Islamist and Ikhwan would never see the day of light again. Being charged with belonging to MB received the death sentence by law.

Add collapse of the Soviet union (Syria was a big victim of this huge event), falling reserves and oil production, currency devaluation, restrictions on foreign exchange transfers using draconian laws, Syria’s economy took a beating just when its fertility was top 10 globally.

Fast forward to 2000 when current President Assad takes over. Yes, expectations and hopes are high both domestically and internationally. A very young population now has one of theirs. He studied abroad. He was surely going to reverse direction both politically and economically.

From the start, Bashar’s main challenge was always going to be how to meet those high expectations. Political activists and thinkers quickly set up Damascus salons to carve a new political platform where they can start to participate in political life.

Economically speaking, there was now talk about allowing foreign banks and even starting a stock market. Economic reforms of this type were always going to produce winners and losers. Those with capital made it big. They now owned banks, insurance companies and hotels.

What about the losers?

The losers were all those 7.4 kids born around 1980 to mothers with high fertility rates and fathers who did not have the income to support them. Those in rural areas fared worse. They were ill prepared or educated. The state was increasingly unable to support them.

The state never implemented family planning campaign. How would Islamists have reacted to Alawi President trying to reduce the numbers of the majority? The state also never communicated to the public that course country was on was arithmetically untenable. The clock kept ticking.

This is not to say State didn’t make mistakes. Old agrarian policies were by now resulting in overexploitation of groundwater resources (again this was an inherited legacy). What was new was 2007-2009 drought that was one of worst in recent memory.

What about corruption?

Corruption thrives in heavily bureaucratic centralized systems where civil servants suffer from frozen salaries and inflation rates that eats away at their real purchasing power. Without supplemental income, employees at all levels of the state apparatus will hardly survive. As the State can’t afford to raise salaries with inflation, employees at all levels are left to fend off for themselves to make ends meet. The state knows it, the public knows it and what you end up with is institutionalized corruption as inevitable consequence of broken system.

For corruption at this level to be addressed, level of public spending and liabilities have to fall dramatically. Size of Government has to be smaller. Public sector has to slim down. Those left can now receive proper wages. Taxes must all get collected as the State gets a handle on finances.

What about corruption at highest levels? What about Rami Makhlouf?

Rami Makhlouf is a wealthy Syrian businessman and cousin of President Bashar al-Assad. He is said to be Syria’s wealthiest man, and no foreign company can do business in Syria without his participation. He owns many companies, including the largest mobile phone network in Syria (Syriatel). — From Wikipedia.

As we found out recently in Saudi, this problem is not restricted to Syria. This is not to say that Rami and leadership made a mistake in occupying such visible position in Syria’s economy. Rami Makhlouf seems to have turned into the lightning rod for every Syrian whose purchasing power or standard of living fell behind.

While it is impossible not to appreciate the reasons behind this widespread public sentiment at the time, a little bit of math helps here. Many cite the “billions that Rami stole”. Suppose that all this is true and that Rami siphoned off $1 billion every single year. Had this money gone to the public, each of 23 million Syrian would have had their income rise $43 a year ($3.65 per month). That hardly solves the issue.

No one ought to dismiss the negative effects of high level corruption at the high end. Appearance and optics matter tremendously and Rami’s case is a perfect microcosm of that. But, had Rami not been around, it would make very little difference to the broader issue at hand.

What about Western political meddling?

The US State Department had run a democracy promotion program since Sep 11 {details here} and many activists were supplied with media training and equipment to help them capitalize on the moment when it presented itself. March 2011 was that moment. {When the civil uprising phase began of the Syrian civil war.}

This was classic case of high expectations clashing with reality on the ground and the system as a whole. What was seen as needed “reforms” to some was viewed as dangerous slippery slope by others.

A nasty cocktail mix that was waiting in the wings as events unfolded in March 2011. Those who wanted more political participation, the poor, those from the rural areas, the Islamists and the Regional/western adversaries of the Syrian Leadership.

Assad May not have anticipated the tsunami early but by the summer and end of 2011, he made up his mind. This was going to be a fight till the end where losing was not an option. There would be no panic but he would stop at nothing till he ensures victory.

In conclusion.

Assad was dealt a tough hand. He inherited a legacy that was born out of years of governance challenges. How to maintain a largely socialist structure while population doubled every 22 years and revenues from country’s natural resources were falling by nearly 50%.

When and if Syria’s war is over, a new chapter and contract must start. The private sector must become the engine of growth. Regulations must be streamlined. Taxes must be cut to level low enough to ensure respectable collection rate.

One final idea: rather than financial handouts, Syria must ask for 20 year grace period that would allow it to get to export to the rest of the world free of duties. Sanctions ought to also be lifted. Investments in labor intensive industries must be encouraged to help employment.

If and when the economy finds its footing, critical that women labor participation rises from the abysmal rates in the region. Studies conclusively show that increased women participation in the labor force is the single biggest factor behind population growth control.

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About the author

Ehsani is a Syrian-American banker, has been writing economic analysis for Syria Comment since 2006 (source). He tweets as @EHSANI22.

For More Information

For more about factors reducing fertility.

• A good introduction: “Effect of Women Education and Employment On Fertility Rate” by Dr. Björn Vollan. See the links at the end.
• “Female education and its impact on fertility” by Jungho Kim — “The relationship is more complex than one may think.”

Ideas! For shopping ideas, see my recommended books and films at Amazon.

If you liked this post, like us on Facebook and follow us on Twitter. Also, see these posts about the Middle East…

1. Martin van Creveld: A history of the turmoil in the Holy Land (you can’t understand the action without it).
2. Japan can again become the land of the rising sun. We should watch and learn from them.(2012) — Falling population & faster automation are great for Japan.
3. Must our population always grow to ensure prosperity? (2013) — Spoiler: no. More about the benefits of a shrinking population & automation.
4. A rocky road lies ahead to a far smaller world population.
5. Why Japan can become an economic star of the 21st century.
6. The facts behind the scary new UN population forecast & those doomster headlines.
7. Doomsters warned of End Times from overpopulation. Now *fewer* people are disastrous.