For Syria to attract investment, it needs the rule of law

Syria has a long development journey ahead of it before it can reach the level of advanced economies elsewhere. Attracting external capital offers a way of accelerating the catch-up process.

However, one of the ways in which Syria and other countries have struggled is in their poor levels of constitutional compliance. Foreign investors feel much safer parting with their capital when there are clear rules that host governments adhere to.

One of the reasons that US President Donald Trump is excited about the prospect of appending Greenland to the US is that it is rich in untapped resources yearning for a capital injection. In Syria, too, a well-designed wave of investment into the nation’s resource base can potentially yield astronomical returns.

Syria also has high educational levels, making it well-positioned to benefit from the influx of cutting-edge technology that foreign direct investment can facilitate.

The country’s economic woes are a complex, multidimensional problem that has attracted the attention of the scholarly community. A recent study by University of Warsaw economists Anna Lewczuk and Katarzyna Metelska-Szaniawska contributes to our understanding by focusing on one perennial contributor to low FDI and, hence, low living standards: poor levels of constitutional compliance.

Social scientists have identified several distinct economics-related functions served by constitutions. Perhaps the most important is that constitutions help overcome short-term thinking by politicians charged with drafting and implementing economic policy. In particular, constitutions typically involve the explicit separation of powers, they enshrine the independence of the judiciary, and they impose limits on the budgetary discretion of rulers.

Together, these elements make it much less likely that an economic tsar will succumb to the temptation of personally enriching, but economically damaging, actions such as expropriating investors or printing money.

Beyond this, constitutions that are ratified by the population at large provide governments with legitimacy in exercising its functions, greatly enhancing its effectiveness in the economic domain. Critical tasks such as collecting taxes, enforcing contracts and building infrastructure become cheaper and progress more efficiently when the government’s actions are embedded in a constitution that people acknowledge and embrace.

Finally, when national-level conflicts that threaten economic stability inevitably arise, constitutions can be highly effective in defusing that conflict.

Accordingly, many countries have seen the adoption of a constitution go hand-in-hand with extended periods of economic prosperity, most notably Germany and Japan in the latter half of the 19th century. Today, countries such as Malta and Singapore enjoy high living standards partially due to the investment-attracting properties of their constitutions. Foreign investors feel safe that their property rights won’t be violated, and that the economy will be managed prudently by governments that are shielded from the myopic thinking that typifies most countries without a constitution.

There is little doubt that, going forward, Syria needs a constitution that represents the interests of all its citizens. But what is just as important as adopting a constitution is actually adhering to it.

Using an open database created by the University of Hamburg scholar Dr Jerg Gutmann and his colleagues, Dr Lewczuk and Dr Metelska-Szaniawska empirically analyse the relationship between economic performance and constitutional compliance. The authors find a clear, positive association, and they attribute this to the aforementioned mechanisms linking constitutions to the economy.

Unfortunately for Syria, it is a poor performer globally in terms of constitutional compliance, according to the database. Foreign capital holders are understandably reluctant to invest in economies where the government feels unconstrained by the constitution, as this often serves as an indicator that investors’ interests could be illegally disregarded at any point.

The consequences can be seen in Syria’s FDI data between 1972, shortly after Hafez Al Assad took over as president, and 2010, in the months before civil war broke out in the country. The level of FDI inflows as a percentage of its gross domestic product exceeded the global average in only two years – 1994 and 2009 – falling slightly or considerably short in the remaining 37 years.

No data is available from 2011 onwards, but it can be assumed that the civil war caused a collapse in inward capital flows in the years since. With much of the country’s infrastructure destroyed, the need for foreign capital is especially acute, affirming the importance of addressing potential barriers to FDI.

As a new global order gradually emerges, and novel economic paradigms displace traditional ones, Syria has an opportunity to reassert itself on the global stage if it implements the right economic reforms.

While many changes are needed for the country to fulfil its potential, understanding the relationship between politics and economics holds the key to solving many of its problems, including the lack of FDI. In this regard, ratifying a new constitution and ensuring high levels of its compliance would be a necessary place to start for the new government in Damascus.