Cyclopedia Of Economics

Switzerland, Economy of

In a series of referenda in 2003-5, Swiss citizens transformed their country forever, economically aligning it with the European Union and opening it up to work migration. It was an uncharacteristic response to increasingly worrisome times.

In March 2003, Switzerland's annual rate of inflation dipped to 1.3 percent. Once a cause for celebration, it is now construed to be a worrisome sign of lurking deflation. Growth has been below trend for years now. Demand is ever-weakening and capacity is idle. Taxes are high, the national debt soaring.

Interest rates are vanishingly low, having been chopped by half a percentage point in March 2003. But the Swiss franc, impervious to these monetary gambits, is at a five year high against the dollar. Switzerland depends on exports and tourism - they constitute more than half its gross domestic product. The almighty currency does its trade balance no favors.

National economic emblems are crumbling left, right and center. In an interview to the daily Blick, Andre Dose, chief of Swiss International Air Lines, the tottering successor of the bankrupt Swissair, begged for tax exemptions, lower insurance premiums and a waiver of airport charges as well as soft loans and subsidies from both government and banks. The airline lost more than $700 million in 2002.

A study recently released by Agrarplattform – a group representing farmers, processors and retailers – disabused the Swiss of their long held conviction that their cherished agricultural sector - notably milk, potatoes and meat - is profitable. Indigenous armaments technology firms - such as the state-owned Ruag group - besieged by anti-war protesters, saw their profits slashed.

In 2002-5, Switzerland's leading brand names - Roche (pharmaceuticals), Credit Suisse (banking), Adecco (manpower) and Zurich Financial Services - have announced record losses and job cuts.

And then there is Severe Acute Respiratory Syndrome (SARS) and avian (bird) flu. Switzerland has been struck with ten suspected cases of the former. It tightened inspections at its airports, cancelled flights and allocated funds for research into the new pandemic. Swiss pharmaceutical company, Roche, produced a diagnostic kit by end-2003.

No sector is spared the slump. Swiss banks, much-decried over the last few years for their alleged complicity in money laundering, are being pried open by assertive United States regulators and a zealous, mainly European, Financial Action Task Force.

In 2002, Swiss banks begun to repatriate to Nigeria more than $670 million looted by late dictator Sani Abacha and deposited with them. In the run-up to the war in Iraq, the government froze $368 million in Iraqi financial assets at Washington's behest, repeating its act in 1990.

Mobsters, terrorists, scammers, venal politicians and tax dodgers now look for anonymity and discretion to Lebanon and Cyprus, or even to Austria, the USA, the United Kingdom and Luxemburg . Switzerland's reputation as a safe pecuniary haven is in tatters.

This was only the latest in a series of upsets suffered by the ailing banking industry.

In August 1998, following intensive public pressure by Jewish organizations - and a thinly-disguised anti-Semitic backlash -Switzerland's two major banks, UBS and Credit Suisse, agreed to set up a $1.25 billion fund to settle claims by holocaust survivors and their relatives. The red-faced Swiss government threw in $210 million. It seems that the banks were in no hurry to find the heirs to the murdered Jewish owners of dormant accounts with billions of dollars in them.

A settlement was reached only when legal action was threatened against the Swiss National Bank and both public opinion and lawmakers in the USA turned against Switzerland. It covers owners of dormant accounts, slave laborers, and 24,000 of 110,000 refugees turned back to certain death at the Swiss border - or their heirs.

A high level international commission, headed by Paul Volcker, a former chairman of the Federal Reserve Board, identified 54,000 accounts opened by holocaust victims - not before it inspected 350,000 accounts at an outlandish cost, borne by the infuriated banks, of $400 million. To compound matters further, the Bergier Commission, set up in 1996 by the Swiss parliament, revealed, in March 2002, that Swiss banks provided the Axis powers with interest free loans.

Wall Street dealt Swiss financial intermediaries and their US-based brokerages, another blow. Recently, they settled with US regulators over charges of issuing biased stock analyses and recommendations. But this did not prevent former star investment banker with Credit Suisse First Boston, Frank Quattrone, from being charged with obstructing justice and destruction of evidence. Many mid-size and large Swiss firms are exiting the tainted capital markets altogether.

In April 2003, according to Swissinfo, the news Web site of Swiss Radio, Jean-Pierre Roth, chairman of the Swiss National Bank (SNB), warned, in its annual meeting, against undue optimism. Deteriorating trading conditions, stagnant consumption and diminished government spending heighten the "risks of a renewed worsening of the situation ... Compared to the previous year, conditions for our companies have worsened."

The country is still hobbled by red tape and anti-competitive cartels. Growth in 2003 was lower than the Bank predicted only five months ago, he admitted. The Organization for Economic Cooperation and Development (OECD) concurs. In its outlook, it warned that subdued conditions abroad and an inexorably appreciating franc continue to threaten the country's recovery.

GDP grew by an imperceptible 0.6 percent in 2003 and 1.9 percent in 2004. The International Monetary Fund (IMF), more upbeat, projected a 0.3 percent uptick in 2003 and 2.4 percent the year after. In 2002 the economy froze at zero growth. Unemployment stood at an unprecedented 3.9 percent in February 2003.

Not all is bleak, though. German chipmaker, Infineon, is considering to relocate to Switzerland. In April 2003, San-Diego based Netrom's Tempest Asset Management inaugurated a currency trading center in Zurich "to gain access to the multi-trillion dollar financial markets in Europe". Swiss firms, from gourmet baker Hiestand to computer peripherals manufacturer, Logitech, are showing record sales and surging profits.

The UBS Index of Investor Optimism, maintained by Swiss mammoth bank, UBS and the Gallup Organization, climbed 61 points in March 2003 - albeit to reach only one third its size in January 2000. Half the population foresee a recovering economy and two fifths believe in improving employment prospects.

Moreover, globalization has coerced Switzerland into abandoning its splendid - and costly - isolation. In March 2002 it voted to join the United Nations - something it has resisted for decades. Swisspeaks, a two month festival promoting Switzerland, took place in April 2003 in New-York.

Ten million visitors attended Expo.02 - a national exhibition in Neuchatel. Seven agreements with the European Union came into force in June 2003. Incredibly, Switzerland is poised to join the Schengen agreement, leading to the scrapping of internal borders with the EU. Banking secrecy will be partially lifted in line with Union directives.

With 7 million inhabitants (one fifth of which are immigrants) - Switzerland is among the richest polities on Earth. Income per capita is more than $38,000. The economy's openness - its weakness - is also its fount of strength. It endows Switzerland with enviable resilience and flexibility.

The country survived intact the first and second world wars, fought on its doorstep. It has reinvented itself, metamorphosing in the process from a backward rustic landlocked domain to a financial cum engineering global empire. It will emerge, as it always does, invigorated and ready for new challenges.

Syria, Economy of

Well into the 1980's, Syria - which could have been the Switzerland of the Middle East - was derided as its North Korea. Belligerent, steeped in paranoia and xenophobia, and socialist to boot - it revolved around the personality cult of the current president's late father, Hafiz al-Assad.

The Western media reported how Syria colonized Lebanon, suppressed the Sunni majority at home, and aided and abetted unsavory terrorist organizations inside the region and without. It is still on the USA's black list, though not a member of the tripartite "axis of evil".

These perceptions are gradually changing. Under the leadership of the soft-spoken, 40 years old ophthalmologist, Bashar al-Assad, Syria seems to be bent on re-joining the international community. In his inaugural address, Bashar encouraged "positive criticism" of the regime, suppressed a nascent personality cult centered around him, and called for economic liberalization.

On March 29, 2002 the Syrian parliament rubber-stamped a law, tabled by the Ministry of Economy and Foreign Trade. According to Sana, the state news agency, the act established a Monetary and Credit Council. But its most daring departure from past practices was to allow banking joint ventures between the government and the private sector.

Applying firms must still be at least 51% owned by Syrians. A January 2002 cabinet decision to allow foreign owned banks to operate in Syria still awaits the habitually-glacial presidential approval.

This ends four decades of ruinous government monopoly, the result of a nationalization campaign by the triumphant Ba'ath party in 1963. Deputy Prime Minister for Economic Affairs, Khaled Ra'ad, said that some 50 foreign banks are interested to set up shop in Syria. This may be an exaggerated figure. One hundred applications were reported following a late 2000 law opening the door to private investment in the banking sector - yet not a single license was issued in the first three years of its implementation.

Foreign, tax-exempt, banks have been allowed to operate in Syria's five free zones since June 2000. But the conditions were so onerous that not many did. Only "first rank" banks with $11 million in capital - in foreign exchange - were supposed to be let in. They were permitted to transfer and receive foreign exchange, usually on behalf of foreign clients. Yet, even these mundane operations were hobbled by a mountain of restrictions and regulations.

A year later, the free zones became nests of money laundering. Six (now five) obscure Lebanese banks provided services to less than 300 clients. Few others followed. The Oxford Business Group quotes a senior Lebanese banker:

"...The CEO of Lebanon's Byblos Bank, Francois Bassil, which is one of the five Lebanese banks established in Syria's free trade zones, told a London-based newspaper that the banks saw almost no activity. He cited problems in Syria's economic and financial environment, as well as the lack of a financial reform law. In a positive step, Syrian media reported in mid-February that one of France's largest commercial banks, Societe Generale was looking to set a up a network in Syria through the bank in France and its Lebanese affiliate, Societe Generale de Banque au Liban.

Despite this disheartening prelude, Syria has no choice but to liberalize its moribund and ossified banking sector. In recognition of this inevitability, Bashar al-Assad, the current president, has shuffled most of the economic positions in his cabinet on December 2001.

He surrounded himself with reformers, some of them Western-educated, as he is. Four of them are members of his "Syrian Computer Society", a hotbed of reform. A notable appointment is Ghassan al-Rifai, the Minister of Economy and Foreign Trade, who spent 30 years with the World Bank. Among his many achievements, he was an active member of the team that launched MIGA - the Bank's Multilateral Investment Guarantee Agency.

This " palace coup" did not go down well with old, Ba'athist, hands and with entrenched economic interests - some of them criminal - in both Syria and Lebanon. Resentment and dejection are mounting and may yet lead to open confrontation. To placate them, the Syrian government has decided not to pursue the privatization of state companies and their numerous sinecures.

Xenophobia and sentiments against liberalization and deregulation are not limited to Ba'athist interest groups. In "Emerging Syria 2002", published by the Oxford Business Group, IFC Senior Investment Officer, Bassel Hamwi is quoted as saying:

"While on a business trip to Syria in 1998 in the wake of the far eastern economic collapse, a Syrian official boasted to me that the Asian Tigers had become vegetarian. Surprisingly, the same antagonism towards liberalization was echoed by many of the private sector businessmen I met as well.

Up to that point, Syrians had chosen to insulate themselves not only from the risks inherent in the global economy, but also from its potential rewards. Two years later, however, it was a very different picture with the government making a concerted effort to open up to the financial world by allowing private banks to be established for the first time in some 40 years. The international community quickly took notice, and considered Damascus' efforts as a welcome signal that further liberalization was ahead.

The local community, however, was more divided. Indeed, Syrian businessmen were happy at the prospects of not having to travel abroad to service their banking needs. But one question that seemed to be on the minds of many was: 'Would liberalization bring about a financial crisis similar to that experienced in East Asia?'"

Syria's tottering economy can be salvaged only by the introduction of a functioning, competitive, well-capitalized, and foreign-managed banks. The EU made this abundantly clear to President al-Assad in his talks about an EU association agreement in March 2002 with Pascal Lamy, the EU's trade commissioner. The same message was trumpeted by an EIB (European Investment Bank) visiting delegation.

Close to 60% of Syria's exports - c. $1.5 billion - are received by the EU. Syria also imported $2.9 billion from the EU last year.

The Heritage Foundation Index of Economic Freedom ranked Syrian banks as 5 - very high level of restrictions. It expounded thus:

"The banking system is completely controlled by the government, which owns all of the country's major banks, and most banks lend only to the public sector. According to the Economist Intelligence Unit, "Syria's financial services are poor, unsophisticated and a serious obstacle to economic development.

There are five banks working alongside the Central Bank of Syria, all of them state-run and state-owned... CBS (Syrian Central Bank) discount rates to the private sector have been fixed at 9% since 1981 (7% for the public sector) irrespective of the rate of inflation. As a result, real interest rates have often been negative in times of high inflation."

Though state-owned, Syrian banks are woefully under-capitalized. The only retail network in the country, the "Commercial Bank of Syria" had less than $25 million in foreign currency reserves in 2000, according to government figures. There are $9 billion on deposit in state banks.

The Central Bank of Syria supervises the Commercial Bank of Syria, Industrial Bank, Agricultural Cooperative Bank, Loan and Savings Bank, Real Estate Bank, the General Syrian Insurance Agency and the General Postal Savings Establishment. These provide the entire range of banking services - but in a cumbersome, costly, and maddeningly inefficient manner.

The banks are subject to intense political meddling. Interest rates are purposefully negative. Public and mixed-sector enterprises crowd out private sector lending. Additionally, Syria has no capital or foreign exchange financial markets to speak of. Surprisingly, non-residents often fare better than locals: they can obtain (Syrian currency) loans based on bank guarantees.

Laws and regulations are often contradictory. Law number 24 prohibits Syrians from holding foreign exchange. Law number 10 permits Syrian investors to deal in foreign currency. This is merely one of a myriad examples.

Corruption is rife. In a typical case, the general director of "Commercial Bank", Nadim Mithqal, was arrested three years ago. According to "Tishreen", an official daily, he diverted loan re-payments to an unidentified, but "marginal", foreign bank. The damage is estimated to be a sorely-needed $5 million. The Miro government seized on this opportunity to re-iterate its demand to limit the term of bank directors to four years.

Syria's banks were treated by the late al-Assad as Ba'ath fiefdoms and venues of patronage. In 1995 he appointed a lackluster but well-connected presidential advisor with no previous banking experience, Mohammed Bashar Kabbara, as governor of Syria's oft-idle Central Bank. Syrian bankers complained bitterly - though anonymously - about this appointment to the Middle East Economic Digest. The latest developments may have made them happier - though, probably, in the Syrian tradition, only incrementally so.

Was Saddam Hussein hiding in Syria? DEBKAfile, an Israeli-owned rumor mill thought so two years ago. He was supposed to be in the Mediterranean coast town of Latakia in the Cote d'Azur De Cham Resort, a neighbor of the al-Assads, the indigenous dynastic rulers. Allowing him entry was supposed to be one of a series of manifestly anti-American moves by the Syrian regime.

The Department of Defense has repeatedly accused the country - still on the State Department's list of terror-abetting polities - of shipping weapons and materiel, such as night goggles and jamming systems for satellite global positioning devices, across the border to Hussein's depleted and besieged forces. Arab volunteers, some bent on suicide attacks, have been crossing into Iraq from an accommodating Syria.

Donald Rumsfeld, the American Secretary of Defense, called these unhindered flows "hostile acts". The CNN quoted former CIA director James Woolsey calling the Syrian regime "fascist". Even the docile Colin Powell warned Syria during his tenure that it is facing a "critical choice".

According to the Kuwaiti daily, Al Rai Al Am, in a related incident, U.S. special forces have demolished two years ago a pipeline which delivered more than 200,000 barrels of heavily discounted oil a day from Kirkuk in Iraq to Syria, in defiance of repeated American requests. A railroad link between the neighboring countries was also blown up. Western sources denied both these reports.

Structures within Syria's military and secret services, acting through business fronts, have been implicated in arms trafficking from Syria to Iraq, including, according to the pro-Israeli Forward magazine and the Israeli daily, Ha'aretz, anti-aircraft missiles, rockets and Scud missile guidance systems, tank transporters and antitank missiles from Russia, Yugoslavia, Ukraine, Belarus and Bulgaria.

The American Israel Public Affairs Committee, a powerful Jewish lobby, intends to capitalize on such bad blood. Its executive director, Howard Kohr, told various media recently that AIPAC will target the transfer of missile technologies from Russia to Syria, Iran and North Korea, two of which are charter members of the "axis of evil" together with Iraq.

On Apruil 2003, repeating accusation aired on December 2002 by Prime Minister Ariel Sharon, Brigadier General Yossi Kupperwasser, a senior officer in the Israeli intelligence community, told the Foreign Affairs and Defense Committee of Israel's Knesset that Syria was harboring Iraqi chemical and biological agents and long-range missiles. Even the Americans found these charges too outlandish to endorse.

Despite fears publicly expressed by Bashar al-Assad and other senior Syrian officials, Syria is unlikely to be the next target of the coalition forces. It is an American strategic asset. An ardent historical foe of Iraq, it joined the American-led coalition in the first Gulf War and the war on terrorism.

Syria also voted for resolution 1441 in the Security Council, calling for Iraq's disarmament under pain of war. It is also indispensable to any lasting Middle East settlement. The administration torpedoed the Syria Accountability Act, a Congressional attempt to impose sanctions on Damascus. According to the official Syrian news agency SANA, Tony Blair called al-Assad to inform him "that Britain disagrees completely with those who promote the targeting of Syria".

At the time, in an interview to the London-based Arabic language al-Hayat newspaper, Powell denied any intention to invade either Syria or Iran. But the conspiracy-minded noted the revival, by Israel, of a plan to carry oil from Mosul to Haifa, through a disused pipeline running via Syrian territory. Hooman Peimani in Asia Times concluded:

"Unless the pipeline were redirected through Jordan, another country bordering Israel and Iraq with normalized relations with Israel, the pipeline project will require a different regime in Syria. In other words, regime change in both Iraq and Syria is the prerequisite for the project. As (Israeli Minister of National Infrastructure, Yosef) Paritzky did not mention a redirecting option, it is safe to suggest that the Israelis are also optimistic about a regime change in Syria in the near future."

The demise of Hussein's pariah regime spells economic trouble for Syria. Still largely a socialist command economy, it has only recently embarked on a hesitant and partial path towards market reforms. Iraq served as both the source of cheap energy and a captive market for shoddy Syrian goods. Bilateral trade, excluding oil, amounted to $2 billion, according to the Khaleej Times, a United Arab Emirates daily.

Syria, itself a fledgling oil producer, re-exported some of the Iraqi crude and much of its own output through a pipeline leading from Kirkuk directly to the port of Banias. It reaped between $500 million to $1 billion annually from such arbitrage. Syria extracts about 400,000 barrels of crude per day and c. 8 billion cubic meters of natural gas a year.

Lebanon is another paradise likely to be lost to Syria in the wake of the Iraq war. The country, largely occupied by the Syrian security apparatus, has been divvied to lucrative fiefdoms controlled by politicians belonging to the late Hafiz al-Assad's old guard.

The Lebanese economy and its financial sector are far superior to Syria's. But the United States is pressing a reluctant Syria to terminate its "occupation" of Lebanon and, thus, to let the West dismantle the infrastructure of terrorist organizations, such as the Iran-backed Hizbullah, that thrive there.

Observers say that the subtraction of the Iraqi and Lebanese windfalls is a blessing in disguise. It will force Syria to modernize, reform its bloated public sector, restructure or genuinely privatize its numerous state-owned enterprises, develop its energy sector and introduce the rudiments of a monetary policy and a banking system. Syrian manufacturers have already begun to develop markets in other Arab countries and in East Europe.

Not all is lost. Syria, a largely agricultural country, enjoyed bumper crops in 2003-4. Its ports inevitably serve as the entry points for goods used in Iraq's reconstruction. Such traffic is a boon to its budding service industries.

Nor is Syria as isolated as the United States and Israel might wish it were.

In April 2003, Jordan and Syria signed an agreement to construct the $87 million Al Wihda dam on the northern Yarmuk River which flows from Syria to its neighbor. It will add 80 million cubic meters of drinking and irrigation water to Jordan's dilapidated supplies. The facility will be erected by Ozaltin, a Turkish construction firm, and financed by Jordan with loans from the Abu Dhabi Development Fund and the Arab Fund for Economic and Social Development.

Turkey has also been reaching out to Syria and Iran in a belated effort to counter an emerging Kurdish polity within a federated postwar Iraq. This rapprochment started prior to the latest Iraq war, days after Colin Powell departed Turkey in the belief that fences have been mended. Iranian Foreign Minister Kamal Kharrazi visited Ankara and Turkish Foreign Minister Abdullah Gul embarked on a trip to Syria.

Iran's President Mohammad Khatami traveled to Syria and Lebanon in early May 2003. President Bashar al-Assad briefly stopped in Tehran in March 2003 to discuss the brewing crisis in Iraq. A common statement of mutual defense against "common enemies" was signed last month (February 2005) .

This flurry of summits indicates the formation of a broad front aimed at countering certain American allies - notably the Kurds. The participants also aspire to affect the future shape of their region. It is a tall order and they may well be too late.

As Richard Murphy, US Assistant Secretary of State for Near Eastern Affairs from 1983 to 1989, recently told the Daily Telegraph:

"There's a perception that the time has come to spread democracy in the Middle East. Their view is that the US paid heavily on September 11 for having not stood by its principles in dealing with autocracies in the Middle East."