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Selfie
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consumer credit regulation in the UK
Corporate Governance: origins and challenges
Proposals for a price cap on high cost short term credit
The Need for Roots?
Syria: the Economic Implications of the Civil War
In Praise of Non-Bank Finance
The Price of Money
Numbers 4 Good
Borrowing Freely
Sceptics Knock Success
Life, Liberty and Access to Credit
Osborne's Banking Reforms: A Hedge Too Far
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Southern Africa: 2020 Vision
Mervyn Turns a Tidy Profit
Private Banking for the Poor
Teaching Jurisprudence in Namibia
George - Don't do that!
Do the Math
Two Cheers for the Walking Wounded
That's Fair Enough
What Crisis?
How to Stop the Next Bubble
Muhammad Yunus
Rethinking Risk
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The unrest in Syria, which started in March 2011, has developed from a local protest movement against authoritarian government into a full-scale civil war. The human cost has been substantial, both in terms of scale and degree. Around 10% of Syria's 22 million people have fled the country, and a further 20% have been forcibly displaced within Syria's borders: one in three Syrians are homeless. The fighting, particularly in key urban areas, has been intense, sectarian and bloody. In addition to the numerous accounts of the execution of prisoners and the deliberate targeting of civilians by fighters on all sides of the conflict, in late August 2013 rockets carrying the nerve agent sarin were fired by the forces of the Assad regime into rebel-held districts on the outskirts of Damascus. Around 1400 people died in what was, according to UN Secretary General Ban Ki-moon, the worst reported use of chemical weapons for twenty-five years.
For the Syrian people this civil war has become a national tragedy that will take many years - perhaps several generations - to be resolved and overcome. In addition to the loss of life and the dislocation of families and communities, there has been significant damage to the Syrian economy. According to the UN, by the end of 2012 the economic cost included the destruction of around one third of the capital stock and the loss of the equivalent of more than half of annual GDP.1 These losses were concentrated in the following sectors: transport, communications, manufacturing, mining and internal trade. Unemployment had risen to 35%; and inflation was running at around 50%. The civil war has been, without doubt, an economic catastrophe for the Syrian people.2
These economic losses need to be set in an historical context. Since 1980, when Syrian GDP per capita was US$1,458 and the country ranked 84th in the world, it has grown very slowly by comparison with other nations. By 2010 its GDP per capita had reached US$2,747, but it had fallen to 127th in the global ranking. By contrast, over that same 30 year period, Turkey rose from 82nd (at US$1,567 per capita) to 63rd (at US$10,135 per capita).3 For at least a generation, the economic development of Syria has been held back owing to inept government policies. In consequence, the total economic losses due to the civil war will be lower than they might otherwise have been, simply because the Syrian nation today is much poorer than it would have been if it had been well governed.
One of the most important short-term effects of the civil war has been the growth of refugee populations in all of Syria's neighbours, creating immediate costs for all the other states in the region, as they seek to house and feed the many Syrians who have crossed into their borders. There are around 500,000 Syrians living in Turkey, to the north; and around 200,000 who have crossed the north-eastern border in to the Kurdish area of Iraq. In the south, the number of Syrian refugees in Jordan is estimated at 500,000, but the biggest group - probably more than a million - have crossed into Lebanon, which borders the south-west of the Syria. The Lebanese government estimates that nearly one-in-four people living in Lebanon is a Syrian refugee.4 The medium term consequences of this diaspora might be very significant.
Many of Syria's neighbours have fragile political systems, and the spread of refugees across the region might prove to be a catalyst for political tension and confrontation on a regional basis. In particular, the influx of Syrian Kurds to the Kurdish areas of Iraq might jeopardise this relatively peaceful and economically successful region of Iraq. It might also provoke a resurgence of Kurdish separatist activity - both political and military - which has the potential to spread to Turkey and Iran. In the south, the political balance in Lebanon might shift towards the Sunni population, since many of the Syrian refugees are from Sunni communities; the sheer scale of their presence has materially altered Lebanon's demography. In turn, this might exacerbate existing tensions between the majority of the Lebanese population and Hezbollah, the Shia militia that is based in the south of Lebanon, near the border with Israel. Hezbollah has sent financial and military support to the Assad regime, thus provoking further waves of Sunni refugees into Lebanon.
More worrying, from an international perspective, is the prospect that the civil war in Syria will draw the larger regional powers into some form of confrontation. If either Iran or Israel concluded that the outcome of the civil war in Syria would be to the serious detriment of its national interests, it is conceivable that one or both might intervene. Such action might precipitate a wider regional conflict; or a series of small, but intense local conflicts. Separately, were the Assad regime to resort once again to the use of chemical weapons it is highly likely that the US, with the support of some other NATO members, would take retaliatory military action. This was averted in September 2013, due to the intervention of the Russian government, who have forced the Assad regime to agree to the dismantling of its stock of chemical weapons. If this disarmament process fails - or stalls - there remains the possibility of some form of military intervention by the US. It is not clear how Russia would respond, and what risks it would be willing to take to support its Syrian allay.
For the moment, while the civil war in Syria has had a devastating impact on the lives of its own people and those of its immediate neighbours, the impact on the wider global economy had been limited. Syria has only modest supplies of oil - around 2.5 billion barrels - compared with other countries in the Middle East: for example, Iran is estimated to have 151 billion barrels and Iraq 143 billion barrels of proved reserves. Likewise its production levels, which have been disrupted by the war, are small: at 0.2 million barrels per day, Syria's oil production is dwarfed by that of Iraq (3 million), Iran (3.5 million) and Saudi Arabia (11.5 million).5 So long as the civil war in Syria remains in Syria, there is not likely to be any meaningful impact on oil supplies and oil prices.
As energy analysts are all too aware if the fighting were to spread beyond Syria's borders or if the US were to initiate military action against the Syrian regime as punishment for the use of chemical weapons, then the risks of a wider regional conflict rise significantly. The US, Russia and Saudi Arabia are the three largest oil producing states in the world (with a combined total of over 33 million barrels per day) and Iran and Iraq are the seventh and eighth largest producers. All of these states have vested interests in the outcome of the civil war; and all, to a greater or lesser extent, have started to intervene in Syria to try to shift the balance of advantage to their favoured side. While the fighting remains local - that is, inside Syria's national boundaries - there is little risk of a "spill-over" that would lead to a short-term spike up in oil prices. Were the fighting to spread - perhaps to the Kurdish areas of Iraq, or to southern Lebanon close to the border with Israel - then there is a real chance that oil prices would be forced higher. If tensions between the US and Iran started to rise, and the possibility of a regional conflict increased, then the risk of disruption to global oil supplies would become a significant factor and oil prices would rise faster and stay higher for longer.
As yet, these worries remain mere conjecture. During September and October changes in the prices of most global financial assets were almost wholly determined by two debates that are taking place in Washington. First, there has been a serious risk that the US government would be forced into a major shut-down and that it would default on debt payments, owing to the failure of Congress to agree a budget and to approve an increase to the debt-ceiling. In mid October it appeared that this problem had been averted, at least for the time being. However, long-term solutions to the US's budgetary and deficit problems remain elusive and there is little indication that the political factions in Congress have either the will or the desire to agree a compromise that would give investors greater confidence in the ability of the US to govern itself competently.
Owing to the fundamental role that US government debt securities play in maintaining confidence within the global financial system, any suggestion that these instruments might be subject to a technical default has a negative effect on sentiment, and thus on prices. Global financial markets are more concerned about the unintended consequences of the games of political brinkmanship being played out in Washington, than the deadly games of military advantage that are being waged in Damascus. For now, at least, the US budget matters more than the Syrian civil war.
Meantime, the Federal Reserve Bank has signalled that at some point - when the economic recovery in the US is better established and once employment gains have become more robust - it will gradually reduce its programme of monthly asset purchases. This process of scaling back quantitative easing - known as "the taper" - had been expected to start this autumn, although it is now likely that growth in the US will be weaker than expected, not least because of the tardiness of its politicians in coming to an agreement on a budget. Asset prices globally have been buoyed by the Federal Reserve's asset purchase scheme, and there is some concern that when the taper is introduced it might lead to falls in prices of bonds and equities. The intentions and likely actions of the Federal Reserve, whose Chair will be replaced early next year, have become a key determinant of asset price fluctuations.
In 2012 US GDP amounted to just over $15.5 trillion dollars, while Syrian GDP amounted to just over $73.5 billion.6 In purely economic terms, the US economy is more than 200 times bigger than the Syrian economy. It is hardly surprising then, that the prices of financial assets respond more quickly to changing perceptions of the credibility of US political and monetary policies than to the growing despair of the Syrian people. The civil war is a national tragedy, but it is not a major determinant of investor expectations regarding global economic growth, which in turn drive the valuations of global financial assets. In the short-term investors' attention will remain fixed on the words and actions of leading US politicians and the in-coming Chair of the Federal Reserve Bank.
If the conflict in Syria were to spread out across the region, then energy and financial asset prices would respond. Investors worry greatly about uncertainty and the possibility of a wider regional conflict in the Middle East would most likely result in broad falls in the prices of equities, combined with a flight to quality to assets that have safe-haven status such as gold and US T-bills. Investors would worry about the impact of disruptions to the oil supply, which has the potential to constrain global economic growth. They would also worry about the damage that a wider regional conflict would have on global trade. In the worse case, a sharp deterioration in relationships between the US and Europe on the one hand, and Russia (and perhaps China) on the other hand, would surely jeopardise many of the global initiatives that are supportive of more sustained economic development. These longer-term risks should not be dismissed: most of the short-term problems that drive assets prices are, in truth, long-term problems that could not been resolved.
If the conflict in Syria remains within Syrian borders, then its financial impact will be far more muted. For the sake of the world economy we should hope that the Syrian civil war remains a local dispute. For the sake of the Syrian people we should hope that this local dispute quickly moves to some form of resolution that will allow the population to return home and to start to rebuild their lives and their livelihoods.
References
1 Quoted in the UN report, "The World Economic Situation and Prospects, 2013", p.132.
See: www.un.org/en/development/desa/policy/wesp/wesp_current/wesp2013.pdf
2 For further data and analysis, see the Syrian Centre for Policy Research report, "Socioeconomic Roots and Impact of the Syrian Crisis" (January 2013). See: www.scpr-syria.org/att/1360464324_Tf75J.pdf
3 All data from The World Bank. http://data.worldbank.org/indicator/NY.GDP.MKTP.CD
4 Hugh Eakin & Alisa Roth, "Syria's Refugees: The Catastrophe", New York Review of Books, October 2013.
5 All data from the US Energy Information Association. www.eia.gov/countries/
6 All data from The World Bank. http://data.worldbank.org/indicator/NY.GDP.MKTP.CD
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