3.5 The economic impact of private investment

If all the approved industrial projects had been carried out to completion, some 65 000 new jobs would have been directly created. As shown before, this represents a negligible increase in existing employment. Even allowing for multiplier effects in other sectors, the impact would still be low, though in the particular sub-sector involved the effect could be relatively larger. Besides, the actual employment created as a result of industrial projects under Law No.10 is lower than 65 000 jobs, because there are many approved projects that never started, projects that ended up hiring fewer workers than expected, and projects approved very recently that are still in the process of implementing the investment itself and are not yet operational. There are no exact figures about these aspects, but at least the no-starters can be identified, and also the projects that are still in the implementation phase without having entered the production stage or without having reached full production regime. As has been shown before, only 31 percent of the projects have become operational.

Based on those results, and assuming that actual implementation is not related to the size of the projects, it can be estimated that between the inception of the Investment Law in 1991 and the year 2000, manufacturing projects under the Investment Promotion regime have directly created about 20 000 jobs, i.e. 31 percent of the total number of jobs foreseen in all manufacturing projects approved by the Investment Council. With an optimistic hypothesis of an overall employment multiplier of about three, the total (direct plus indirect) impact on employment should be 60 000 jobs approximately along the period considered (1992-2000), i.e. some 6 700 new jobs per year. This may be still an overstatement, since the actual multiplier may be lower and, besides, many of the companies are not yet working at full capacity, and have recruited only part of the labour they would eventually need when they attain full capacity utilization.

If those numbers were true, however, they would mean an annual increase of 0.16 percent in total employment, with a total investment equivalent to US$2.11 billion or US$234 million per year (1.8 percent of the average GDP in the period). The estimated total investment-elasticity of employment is, as anticipated before, very low, with a value of about 0.089 (an increase of 0.089 percent in employment is directly or indirectly achieved by investing one percent of GDP in this kind of industrial projects). To create a 3 percent increase in employment, as needed to keep pace with the increase in the labour force, the total investment necessary would be 33 percent of GDP (the usual investment ratio in Syria is only 20 percent of GDP).

The specific impact of agribusiness projects on agricultural and food-industry employment is also relatively small. Projects in that sector have created, as estimated before, some 740 new jobs per year. It is difficult to estimate the actual size of employment in the agro-industry sector, but based on partial evidence from employment data, the structure of production and the output/labour ratios in the public industrial sector, it should be about 33 percent of all industrial employment, i.e. about 170 000 workers, of which about 100 000 are in the public agro-food sector and 70 000 would be in the private agro-food industry (agricultural production employment in the approved projects is very small and is neglected in this estimate).

Thus, the new jobs created by the implemented projects represent a yearly increase of about 1 percent on private employment in agro-food industries, and a 0.4 percent increase on the overall agro-food sector employment. Again, the increase is quite small compared to an expected increase of 3 percent in the labour force. The Law No.10 projects would cover only 13 percent of the annual increase in agro-industry employment. Since the private sector is increasing faster than the public sector in this industry, the 1 percent annual increase in employment coming from the Law No.10 projects represent probably not more than 20 percent of the total increase in the number of workers employed in the private agro-food industry.^[34]

The indirect impact of agribusiness projects on employment is only a matter of speculation. It is well-known that agro-industry normally has a much larger employment multiplier than other branches of the manufacturing sector, because of the higher labour intensity of agriculture, especially for fruit, vegetables and other non-mechanized parts of agriculture. If a multiplier of about three is acceptable for the manufacturing sector as a whole, a multiplier of five is realistic for agro-industry, especially for factories related to labour-intensive agricultural products such as fruit, dairy products and vegetables. This means that the 740 new jobs per year created directly by the agribusiness firms established in 1992-1999 may have a total effect of creating about 3 700 new jobs per year in the economy. On a total labour force of 4.1 million (average for the 1990s), this would mean an annual increase of employment of 0.09 percent, achieved with an investment of US$62 million per year. As this amount of investment is about 0.47 percent of the average GDP of the 1990s, the resulting direct and indirect investment elasticity of employment is 0.09/0.47 = 0.19. This is substantially above the 0.089 elasticity estimated before for total manufacturing. According to this result, investing one percent of GDP produces a 0.19 percent increase in overall employment, if the investments are in agro-industry. Investments in all branches of industry would need to invest an amount equivalent to 33 percent of GDP to get a 3 percent increase in employment, as needed to keep pace with the demographic increase of the labour force. Investing 33 percent of GDP is of course quite unrealistic. Investments in agro-industry would achieve the same goal by investing only 15.8 percent of GDP, which is much more feasible. In other words, a way of increasing the employment impact of projects under Law No.10 would be to encourage projects in agro-industry.^[35]

In conclusion, therefore, it may be stated that the employment impact of private investment projects under Law No.10 for the 1992-2000 period has been very small, but projects in agro-industry have a significantly larger impact.

b) Impact on investment

To ascertain the impact of Law No.10 on private industrial investment, the total amount of private industrial investment should first be estimated from available statistics. Gross fixed investment in the industrial sector of Syria was about US$0.95 billion per year during the 1990s. Gross private fixed investment in all sectors was about US$1.5 billion during the same period. The latter figure includes residential investment, which amounted to about US$500 million, thus leaving an estimate of non-residential private investment of about US$1 billion per year. Total (public and private) investment in industrial and commercial buildings and in machinery and equipment was about US$1.2 billion per year on average. Considering budgeted investments by the state-sector industrial companies, it may be estimated that private industrial investment registered in the National Accounts amounted to about US$400 million per year.

In fact, prior to Law No.10 investment was much lower. In 1990-91 total investment was US$2 billion, total private investment was US$1 billion, total private non-residential investment was US$700 million, total industrial investment was US$400 million, and private industrial investment could be estimated at about US$120 million only. The following table shows the estimated impact of the Law on the increase in investment, during the period 1992-2000, related to various concepts of investment. For this table, only manufacturing projects are considered.

Table 3.6 Estimated impact on annual investment of industrial projects under Law No.10, in the period 1992-1999

(*) Estimated. Not published in National Accounts tables. Investment by public industrial companies deducted from total industrial investment, both reported in National Accounts statistics.

Source: Based on National Accounts and data from the Investment Office.

The last column shows the estimated direct impact of industrial projects resulting from the implementation of Law No.10, as a percentage of the total increase in each concept of investment. Thus, these projects have contributed 16.9 percent of the total increase in investment, 34.8 percent of the increase in industrial investment, 69 percent of the increase in private investment, and 83.9 percent of the increase in private industrial investment. Therefore, and unlike the conclusion concerning employment, private industrial investment under Law No.10 has had a significant impact on investment. Multiplier investment effects are not included, and are hard to estimate with the information at hand. However, it is clear that the impact would look even larger if the indirect or multiplier effects were considered.

c) Impact on production

It is not possible to evaluate the actual or expected production of the companies licensed under Law No.10. Only projected capacity (in physical terms) was included in the projects' documentation, and even that information has never been processed nor given a monetary value for the purpose of aggregation. No record exists of the production levels attained by those projects that effectively are operating. There is only aggregated information for the public and private sector. The following analysis concentrates on the food, beverages and tobacco industry, and a number of specific commodities.

The data shows clearly that little progress was made until 1994 in this respect, chiefly because the new investments resulting from projects approved since 1991 took about three years on average to start operation. Growth of private production accelerated in 1994-1999, while the state sector mostly stayed behind, and the percent participation of the private sector in the total output of each commodity shows its growing importance within the industrial sector.

Table 3.7 Food, beverages and tobacco industry: Net Domestic Product by sector, 1990-1999 (million SP)

(*) 1999 estimated.

Source: Industrial sector statistics in Statistical Abstract, 1995, 1996 and 2000.

Figure 3.6 Food and beverage industry net domestic product, 1990-99 (million SP at 1990 prices)

The rapid growth in private industrial food production contrasts with the comparatively sluggish state sector, but even the State sector grew noticeably in the 1990s. Whereas the private sector in 1990-1999 grew at an average yearly rate of 29.7 percent, the state food sector increased its Net Domestic Product by an annual 12.1 percent. The whole sector grew at 22.8 percent per year. The trend towards a larger participation of the private sector is evident in many agribusiness sectors as shown in the following table.

Table 3.8 Percent participation of the private sector in the production of selected foods, 1990-98

Notes: (*) Estimated, based on the estimated increase in wheat consumption, and estimates of a stable state production of bread in 1990-1995. (**) A distilled alcoholic beverage. (***) There are indications that some private wine producers exist. They are not included in the source.

Source: Data from the Ministry of Industry, taken from the Statistical Abstract, issues of 1995 and 2000.

d) Impact on foreign trade

Investments affect foreign trade in several ways: increasing exports of finished products, increasing imports of inputs and machinery, and by import substitution, i.e. substituting national goods for formerly imported products in the domestic market.

The impact of the projects on the import of inputs is more important, from the point of view of policy, than the impact on the import of equipment, since the latter is financed normally with foreign investment, and puts no pressure on the country's supply of foreign currency. Imported inputs, instead, are a regular and recurrent cost, which would increase in volume and value as the projects develop. Those inputs may include raw materials such as imported oilseeds for a vegetable oil factory, ancillary inputs such as chemicals or packaging materials needed in the process of making vegetable oil or fruit preserves, and machine spare parts (the latter may also be classified as capital goods). They may even include intangible inputs such as payments for foreign licenses. The indirect impact on input importation includes the new inputs needed in sectors related to the investment (e.g. more fertilizer for farms producing the oilseeds locally). Unfortunately, available data are not sufficient to estimate this kind of impact in any meaningful way.

The impact of the projects on the imports of capital goods, instead, can be estimated from the committed investments in machinery and equipment and the rate of actual implementation of the projects. Approved industrial and agricultural projects involved programmed equipment imports (for projects approved up to 1999) of SP171 billion or about US$3.73 billion, of which about 31 percent or US$1,171 million would have been already invested. As these imports have been implemented during a period of nine years (1992-2000), the added flow of machinery and equipment imports per year would be about US$130 million (not counting the importation of vehicles for projects in the transportation sector). The annual average value of imports of machinery and equipment (or its parts and accessories) in 1992-1999 was about US$190 million. Since the annual amount of private imports of equipment in 1990-1991 was much lower (about US$23 million), the increase in private annual imports of machinery and equipment between 1990-1991 and 1992-1999 was about US$167 million. Machinery imports generated by projects, estimated at US$130 million per year, are thus responsible of about 78 percent of the increase in private imports of equipment.

The impact on exports is also hard to assess, since no data are available on the level of production or the destination of the projects' output. Several products of agribusiness projects such as processed fruit and vegetables have a clear orientation to foreign markets, but the exports of such products has not increased significantly in recent years (they have been stagnant since 1994, though somewhat higher than in 1990-1991). It is probable that most of the potential increase in exports derived from private investment projects licensed under Law No.10 would only occur in subsequent years, as more companies learn to access foreign markets and adapt their production to foreign demand, and the government also achieves trade agreements with potential destination countries (mainly the European Union, but also other Arab countries and those formerly in the Socialist bloc)^[36]. In the meantime, assessment of the impact of the Investment Law on exports is premature. However, some idea may be gathered from the behaviour of private-sector exports of processed agricultural products during the 1990s.

Between 1994 and 1999, the current dollar value of exports of processed food and beverages fell from 183.8 to 125.2 million dollars, a fall of 32 percent. It affected both private and public exports, but on average the private sector fell much less (-16 percent) than the public sector (-91 percent). The decline was due mainly to large falls in international prices for food products and a shift in the export commodity mix towards products that have a lower price/volume ratio. In fact, the private sector increased its volume by 50 percent in the period, whereas the public sector decreased it by 93 percent. The fall in prices hit (on the whole) only the private sector, whose unit values fell by -44 percent, while the unit export value for the state actually increased by 23 percent.

Table 3.9 Private and State exports of food and beverages, 1994-1999

Source: Central Bureau of Statistics, Statistical Abstract (1995 and 2000).

As a consequence, the participation of the private sector in exports of food and beverages actually increased from 78 percent to nearly 97 percent over the same period. In real (quantity) terms, state exports decreased 93 percent while private exports increased by 50 percent. This implies that among food and beverages exporters, those in the private sector were more competitive, and therefore they weathered the decline in foreign markets purchases better than the public sector, in spite of the explicit or implicit subsidies available to the latter.

In the future, private food exporters are not expected to make large gains in market share, since they already control 97 percent of all Syrian food-industry exports. Their progress will be seen in the expansion of food exports, which may grow significantly when more companies recently licensed enter into exports. A trade agreement with the European Union (EU), as well as more aggressive marketing in Arab countries and Eastern Europe, and the establishment of better grading and standards, would greatly enhance that prospect.

e) Impact on the balance of payments

The impact of the projects on the balance of payments can only be gauged through their impact in the inflow of private capital in the form of private flows of foreign direct investment and unregistered private capital flows. Impacts on the current account occur under the form of increased imports and exports of goods and services, and also through profit remittances, but these are not directly measurable at the moment.

The projects licensed up to 1999 contained a total commitment to invest US$5.92 billion in foreign currency, of which it could be estimated that not more than US$1.8 billion correspond to projects that have started operation, at a rate of as much as US$300 per year along the period 1994-1999^[37]. The actual figure is in all probability significantly lower, since not all projects have implemented their full investment schedule, some foreign currency entered the country it before 1994, and some investment was not made by bringing the foreign currency to the country but by directly importing the equipment, as permitted by the Law. A reasonable estimate of foreign currency actually brought to the country for investments authorized under Law No.10 would be about US$200 million per year in the 1994-1999 period.

Comparison with balance of payments figures is problematic, since such figures are far from clear in Syria, and significant flows are apparently not registered, or are registered under other headings than normally expected. According to the Central Bank of Syria and IMF estimates, foreign direct investment (FDI), which was quite low at the beginning of the 1990s, increased sharply to US$251 million in 1994, but fell to US$100 in 1995 and remained between US$80 and US$90 thereafter, for an average of US$115 million (excluding the start in 1999 of foreign investment in gas extraction, which is independent of Law No.10).^[38]

Errors and omissions, usually interpreted as net unregistered flows of private capital, were positive in 1994-98, varying around an average of US$95 million per year. Added to the former figure for registered FDI, this adds up to about $210 million per year of FDI, which is consistent with the previous estimate of US$200 million per year in foreign currency inflows determined by foreign direct investment connected to Law No.10. In other words, it appears that the Investment Promotion Law is responsible for about 90 percent of all monetary flows attributable to private direct foreign investment flowing into Syria during the 1990s.

According to the same sources, during the 1994-1999 period the net foreign currency position of the banking system increased at a rate of US$466 million per year, of which the estimated US$200 million contributed by the projects represented about 43 percent. Thus, foreign direct investment in projects licensed under Law No.10 contributed about 43 percent of the increase during the 1994-1999 period of net foreign assets held in the Syrian banking system.