A critical examination of the theoretical investment approaches within the context of state-controlled developing economies

This book critically reviews the neoclassical and the demand-led approach to investment and argues their inapplicability to the Syrian case. The neoclassical approach presents a static mathematical representation of the determinants of investment in fixed capital assets that is constrained by unreal assumptions, one of which is that expectations of profits are considered to be either certain or at least foreseen or computable. Obviously, in the turbulent conditions of Syria, not much is relatively stable enough to be foreseen. The neoclassical approach considers an adjustment approach to investment analysis. It rightly focuses on profit maximisation, the primary determinant of investment decision. However, it meaninglessly assumes that investment moves a certain stock of capital from disequilibrium to the 'equilibrium level' or the 'optimal stock of capital.' More particularly, it considers the cost of capital or supply-side variables as the main determinants of investment, largely overlooking the broader macroeconomic variables, such as the changes in aggregate demand or level of output and its associated change in profit rates. In this regard, this approach shifts the analysis of investment determinants 'from centre to side-stage, if not into the wings' and is subjected to criticism by many economists who adopt the demand-determined system as means for economic analysis (Sawyer, 1985: 44). As such, this approach hardly corresponds to the conditions in the developed world, but is most unfitting to a developing economy, such as Syria.

Another limitation to the neoclassical method is that it considers capital to be homogeneous and justifies the use of the surrogate - homogenous - production function (Samuelson, 1962). This incited a lively debate on capital theory in the 1960s, the Cambridge Capital Controversy, which challenged the assumption of the homogeneity of capital by presenting the measurement problem and concluding that capital is not homogeneous but is an ensemble of heterogeneously produced goods (Sraffa, 1960).

The demand-determined viewpoint combines a positive macro relationship of growth and investment with a behavioural component to investment decision in fixed capital assets, because private entrepreneurs are mainly influenced by their 'animal spirits' (Robinson, 1964). From a macroeconomic perspective, investment decision is influenced by the change in the level of national income and its associated change in the profit rate. The expected future rate of profit is the principal driver of investment. When expectations for profits are high, investment will take place and the economy will be thrown into an unsustainable boom, after which the profits expected by investors cannot be realised. This will consequently dampen the expectations for profits and investment will simultaneously slow down, pulling the economy into a slump.

It follows that private investment is highly influenced by expectations - that is, by what are known as adaptive expectations: expectations determined by present and past events. Because expectations hold primacy in the determination of investment, private investment becomes volatile and does not settle into a 'state of equilibrium' (Kalecki, 1990; Keynes, 1937; Robinson, 1980 [1964]). There are also times when expectations can transmute into uncertainty or immeasurable risks, such as a war or an unanticipated social unrest or political uprising, which is undoubtedly the Syrian context. When the risk factor is high, adaptive expectations become intractable and as such they are inapplicable to the Syrian case. In this regard, Keynes (2008 [1936]) argues for 'socialisation of investment.' He recommends that the state promotes state-led investment to act as a counterweight to fluctuations in private investment and guarantee an adequate level of effective demand that in turn can secure the continuity of the capitalist system. But, the type of socialisation that Keynes desired, which is demand-management with private sector leadership, is not possible in a state whose productive capacity is wanting and whose private sector is not committed to the national interest.

This book argues that these ahistorical theoretical approaches that study investment are inadequate for examining the trajectory of investment in developing countries like Syria. Investment in state-controlled developing economies obviously does not occur in an explicitly free- market context. The market forces that set prices and shape future expectations do not take account of changes in investment strategies in these economies. More important, developing countries are much more concerned with deficiency of modern capital resources: that is, they need to build their productive capacities (Kalecki, 1976; Nurkse, 1964).

In this case, promoting investment in fixed capital assets becomes more challenging, because the issue lies at the very centre of the development debate in the Third World - that is practically a building capacity debate. Developing countries' problematic is not about macro expansion when at full employment - the fairy tale of mainstream macroeconomics - causing inflationary pressures and backfiring in terms of real demand. Developing countries lack the capacity in which resources could be fully utilised. So, investment in a developing country therefore differs because the state needs to use money expansion to mobilise idle resources, labour, and natural resources, infuse new technology into the production process and create capacity. The state, which is the biggest holder of capital, plays a crucial role by guaranteeing the building of productive capacity, circumventing fluctuations in private investment and the business cycle.

In Syria, the state had governed market performance. Inter-firm exchange and trading were undertaken by a pre-set system of prices; monetary and fiscal policies ran commensurably with one another; and money was rationed and directed by the state and the public sector until liberalisation broke this equilibrium. The interest rate was state-determined and remained fixed for almost 20 years (interview with Al-Zaim, 2007). The market price was not formed by the standard supply-and- demand conditions; nor did it signal how investment demand or any other demand should proceed in the future. Investment in Syria was therefore not related to market-determined changes in interest rate or other prices, but continued to be under the thumb of the state, always until the beginning of liberalisation. Lending to private and public investors by private financiers was negligible or nonexistent; credit was only extended by state banks according to a predetermined credit allocation plan. Because Syria needed to build up its weak productive capacity, it was the state, especially under Ba'athist rule, that determined state-led investment, grew the public sector, and increased credit that financed private and public investment. The process of capital accumulation in Syria therefore remained state-determined for decades.

Against this backdrop, it becomes feasible to study the politically empowered social force that acted behind the state-controlled economy and that was responsible for the amount and types of investment during Syria's successive historical phases. The book situates the analysis of investment within a historical context to analyse the factors that determined long-term or productive types of investment during the Ba'athist regime on the one hand, and the short-term and parasitic types during the Assad regime, on the other. More particularly, the book employs a class-based political-economy approach to identify the social force or agent of investment that pushed for one type of investment and against another. Several factors compelled this agent to endorse certain types of investment; decisions were shaped by the sociopolitical conditions that prevailed during a specific historical period.

This book therefore looks into investment performance beyond static mathematical functions or the fluctuating nature of investment, which, in turn, translates into either growth or economic downturn - the business cycle. In contrast to the ahistorical micro or macro approach, the book analyses investment from a political-economy viewpoint that understands investment as inextricably intertwined with social forces, thereby identifying the social class or human agent that controlled the means of production and had determinative bearing on investment decisions during a specific historical period. By integrating social, political, historical and economic factors, it offers a fuller and more comprehensive framework for analysing investment in Syria.