Economic Research Forum (ERF)

Building a knowledge economy in Syria: external and internal shocks

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Several studies suggest that the more open an economy is, the more vulnerable it will be to major global events and what is happening in neighbouring countries. This column summarises empirical evidence that goes against this narrative of the importance of such ‘external shocks’. In the context of the transition towards a knowledge-based economy in Syria, internal shocks have a stronger impact.

In a nutshell

Attributing the failure of Syria’s transition towards a knowledge-based economy to external shocks is unrealistic; considering internal shocks is a fundamental step toward a deeper understanding of real causes and identifying system shortcomings.

In the long run, the Syrian conflict is more determined by internal factors than by external shocks: this is because of the way that the dynamics of the conflict have evolved and the economic policies adopted in the period of conflict.

Formulating national policies for innovation, technology and science, and reaching a political settlement within the framework of a clear and comprehensive strategy are essential steps for rebuilding Syria’s post-conflict economy.

Small economies are vulnerable to political and economic events in their neighbourhood and in major global countries – what are known in economics as ‘external shocks’. Several studies have analysed the impact of such shocks on the performance of countries’ key macroeconomic indicators.

Another strand of research has investigated the impact of internal shocks on economic and social indicators. Internal shocks include shifts in adopted economic policies as well as internal conflicts and civil wars, and the shock that they pose to economic and social indicators.

In our research, we test the narrative of the importance of external shocks in the transition towards a knowledge-based economy in countries experiencing political and social instability – in our case, Syria. We consider such analysis crucial as it considers the impact of both external and internal shocks on Syria’s knowledge-based economy, and consequently identifies the true sources of transition failure.

Syria has an economic structure that is susceptible to external shocks due to its relatively small manufacturing sector and overdependence on agricultural and tourism. The current state of Syria can be summarised by its move from 48th place in the index of fragile states in 2010 to fourth place in 2020 (after Yemen, Somalia and South Sudan).

The Syrian economy has witnessed several events in the period before and after 2011. Here we are interested in investigating the impact of two internal shocks: one before 2011 – the internal liberal policy shock since 2005 – and one after – the internal shock of the Syrian conflict in 2011, in addition to the external shock of the Arab Spring.

 

Conflict and innovation performance

Several channels are proposed in previous research to describe how political instability might affect a country’s innovation and technological activities and, as a consequence, impair its transition process to a knowledge-based economy.

  • First, trust and certainty are crucial for a ‘triple helix’ model to flourish in the economy. Political instability creates an atmosphere of mistrust between essential units of innovation and in both formal and informal institutions, which undermines innovation.
  • Second, the uncertainty caused by political instability discourages local and foreign investors from making investment. Political instability reduces inflows of foreign direct investment and human capital development, which consequently impairs rates of innovation and investment.
  • Third, the migration of skilled people due to political instability is another source of impairment of the transition process to a knowledge-based economy. The brain drain of trained professionals, academics and scientists will impair innovation activities and slow down the transition. In addition, entrepreneurs will leave unstable countries because they will not be able to establish or run businesses there.
  • Fourth, the shift in resources from investments in research and development (R&D) to unproductive costs and military expenditures in politically unstable countries would hinder their transition efforts.

 

The narrative of external shocks is dominant in research on this topic in general and in studies of Arab countries in particular. This dominance makes the validity of this narrative questionable and launching an investigation on its validity meaningful.

In our opinion, the impact of external and internal shocks is limited not only to macroeconomic indicators, but also to other indicators associated with the transition process towards a knowledge-based economy. To the best of our knowledge, no previous study has analysed the impact of external or internal shocks on the transition.

 

Internal versus external shocks

To analyse the impact of internal and external shocks on the knowledge-based economy in Syria, we use what is known as a structural VAR model. The results show that in the short run, liberal policies have a negative impact on the knowledge-based economy due to the absence of a national economic strategy aiming to transform the Syrian economy. This is confirmed by the absence of a national strategy for science, technology and innovation until late 2019.

The results also show that in the short run, the internal liberal policy shock plays a more important role in interpreting changes in the Syrian knowledge economy. This can be explained by the nature of the liberal policy that has been adopted by the Syrian government, because this policy was not well structured at the first stage of its implementation. It was neither liberal enough nor pro-innovation enough to activate intensive knowledge-based activities in Syria in that period.

The results of the long-run analysis show that the external shock of the Arab Spring affects the internal conflict more than the internal policy shock. This can be explained first, by the nature of the Syrian conflict, which has taken an international dimension; and second, by the unstable and unstudied liberal policies that widened social polarisation and marginalised a huge fraction of the society leading to the erosion of its human capital.

In this context, it is worth mentioning that poverty rates in Syria have risen from 30.1% in 2004 to 33.6% in 2007 to 86% in 2016. Some rural regions have witnessed even higher poverty rates.

Our results also show that in the long run, internal shocks and internal conflict have a large influence on Syrian knowledge economy, and help to explain variances of the knowledge economy variables in Syria of 45.3% and 26.5% respectively. That is, internal shocks explain approximately 72% of the variation in the knowledge economy in Syria in the long run. But external shocks explain only 23.5% of the variation in Syria’s knowledge economy.

To conclude, the narrative of external shocks and their impact on the Syrian knowledge economy are valid only in the short run. In the long run, the narrative of external shocks cannot provide a comprehensive explanation of changes in the knowledge economy.

Internal shocks, whether associated with political and security instability, or those associated with poorly implemented national economic policies, are the ones that have the greatest impact on the process of building a knowledge-based economy in Syria in the long run.

Based on these results, it can be argued that formulating national policies for innovation, technology and science, as well as achieving a political settlement together with an agreement on the identity of the Syrian national economy within the framework of a clear and comprehensive strategy, are essential steps to build a knowledge-based economy in post-conflict Syria.

Moreover, all narratives that link the failure of the Syrian transition process towards a knowledge-based economy merely to external shocks or factors are unreliable and deceptive.

 

Further reading

Alnafrah, Ibrahim, and Suliman Mouselli (forthcoming) ‘Testing the external shock narrative of the conflict on transition towards knowledge economy in Syria’, ERF Working Paper.

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  • Ibrahim Alnafrah
    Ibrahim Alnafrah
    Faculty of Economics, Damascus University, Damascus, Syria
  • Sulaiman Mouselli
    Sulaiman Mouselli
    Dean of the Business Administration Faculty and Senior Lecturer of Finance at Arab International University (AIU)

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