ملاحظات أولية حول قانون تشجيع الاستثمار 25/07/2022

سيطرت كلمة "استثمار" على تصريحات وخطابات ووعود الدكتور بشر الخصاونة، رئيس الوزراء، منذ تشكيل حكومته في 12 تشرين الأول 2020. ويجري تداول مشروع قانون تشجيع الاستثمار منذ فترة. كما تداول العديد من الجهات والأفراد مشروع قانون جديد للاستثمار و تمت دعوة بعض المؤسسات للتعليق عليه. وفي حال إقراره، سيصبح هذا القانون هو قانون الاستثمار السادس عشر الذي يسنه الأردن على مدى السنوات الـ 67 الماضية. أي أن الأردن "يتميز" للأسف في كونه حاضن لقانون استثمار جديد كل أربع سنوات ونصف تقريبا.

في البداية، أريد أن أذكّر بأن الأردن، مثله كمثل أي دولة أخرى، يتوجب عليه المحافظة على التوازن بين تحديث التشريعات واستقرارها، مما يعني أننا يجب أن نتجنب تغيير مثل هذا التشريع المهم كل أربع أو حتى 10 سنوات.

تعد قوانين تشجيع الاستثمار أداة سياسية أساسية لتشجيع الاستثمار وتنظيمه في العديد من البلدان حيث تشكل الإطار القانوني الأساسي للاستثمار عبر الحدود وتحتوي في كثير من الأحيان على أحكام مماثلة لتلك الموجودة في اتفاقيات الاستثمار الدولية.

توصلت أبحاث الأونكتاد إلى أن ما لا يقل عن 108 بلد لديها قانون استثمار، 90 منها من البلدان النامية أو البلدان التي تمر اقتصاداتها بمرحلة انتقالية. ويطبق 58٪ من هذه القوانين على المستثمرين الأجانب والمحليين بينما تستهدف القوانين الأخرى المستثمرين الأجانب فقط. وهناك قواعد معينة يجب أن تنطبق على أي قانون لتشجيع الاستثمار، والتي تشمل:

1.   انشاء مجموعة واضحة وشفافة من الحوافز والشروط التي يتم تقديمها بصيغة محببة للمستثمر. بمعنى آخر، يجب أن تكون الحوافز والشروط مبسطة ومفصّلة وتلقائية (الحكومة الإلكترونية). لا داعي للذهاب إلى رئيس الوزراء أو الوزراء أو الوزير في كل مرة يتم فيها تقديم حافز.

2.   تجنب إصدار الأنظمة أو اللوائح أو التعليمات في وقت لاحق. إذا لزم الأمر، يجب القيام بإصدارها حين إصدار القانون وليس بعد إصداره بشهور أو حتى سنين كما حصل مع قانون استثمار سابق.

3.   تجنب اصدار الحوافز العادية من خلال لجان، وتجنب وضع لجان كثيرة، فمعظم الحوافز قد تكون تلقائية ومن خلال الموقع الالكتروني للحكومة.

4.   يجب أن يكون قانون الاستثمار بسيطًا وواضحًا، وأن تكون الإجراءات شفافة، لتجنب السلطة التقديرية، التي لا تشجع التأخير البيروقراطي فقط ولكن تنمي الفساد أيضًا.

5.   كلما صغرت الدولة، زاد ما يتعين عليها القيام به لجذب المستثمرين. في حال اقتصاد صغير كاقتصاد الأردن والذي يعاني أيضا من معدلات نمو اقتصادية منخفضة للغاية، يجب أن تقدم الحكومة حوافز أكبر وأكثر من غيرها لجذب الاستثمار.

6.   يجب أن تتجاوز الحوافز موضوع الإعفاءات الضريبية، والتي يجب أن تكون منخفضة على أي حال، بحيث تقلل الحوافز من تكاليف الإنتاج، فتشمل العقارات، والأجور، والطاقة، وضريبة الضمان الاجتماعي، والمياه، والفوائد على الائتمان، والرسوم، وما إلى ذلك من أمور ممكن ان تعيق الاستثمار.

7.   النص على إمكانية منح حوافز إضافية تتجاوز الحوافز التقليدية للاستثمارات والمشاريع الاستراتيجية لأن الحكومة ترغب في استقطاب هذه المشاريع كروافد للاقتصاد.

8.   يجب ألا يكون قانون تشجيع الاستثمار طويلاً، بل قصيرًا وواضحًا وان نتجنب اصدار قانون ضخم، فالمستثمر لا يحتاج إلى أن يصبح خبيرًا قانونيًا وإداريًا قبل أن يقرر الاستثمار في الأردن.

9.   كما لا يجب أن يتضمن قانون تشجيع الاستثمار العقوبات والصلاحيات وهيكلية وزارة الاستثمار والمواد الإدارية في قانون تشجيع الاستثمار لأن المستثمر لا يهتم بكل ذلك. فهذا قانون لتشجيع الاستثمار، وليس لإخافة وترويع المستثمرين. إذا احتاج المشرع إلى ذكر العقوبات والإجراءات الإدارية المتعلقة بالاستثمار، فيمكن وضعها في قانون منفصل، وليس في قانون تشجيع الاستثمار.

10.                    في عصر العولمة حيث تتنافس الدول على الاستثمار الأجنبي المباشر، ينبغي مقارنة قانون تشجيع الاستثمار مع قواني أفضل المنافسين في جذب الاستثمار الأجنبي المباشر.

هل يلبي قانون تشجيع الاستثمار الجديد  كل هذه المعايير؟  لا أعتقد!!!!

Prescriptions to tackle unemployment 07/02/2022

Unemployment is a manifestation or result of many problems that have chronically plagued the Jordanian economy. Tackling unemployment in Jordan, which had reached 25 percent in the first quarter of 2021 and is currently 50 percent among the youth (age 15-24), requires a solid understanding of the problems and possible remedies. And, as usual in economics, there is no silver bullet. The solution is multifaceted.

The labor market in Jordan is distorted. The government and the Gulf have highly distorted the market. Both are strong employers of Jordanian labor, and both are becoming less likely to continue this demand pattern. The government in Jordan cannot afford to continue its policy as its resources have been stretched to the limit, and the Gulf countries have many substitutes for Jordanian workers.

Let us review the unemployment rates over the past 30 years. During 1991-1993, a period that witnessed an influx of Jordanians repatriating from the Gulf countries, at the time of the first Iraq War, who spent/invested their savings and UN compensations in Jordan, the unemployment rate averaged 19.5 percent while the economic growth rate averaged 6.8 percent in real terms.

Economic growth in 1992 jumped to 14.3 percent in real terms from a low of 1.6 percent in the previous year. This upsurge in the real economy was caused by the fact that the money was invested in bricks and mortar and real estate, which can quickly mobilize several sectors and create immediate growth in the economy. But the growth creates jobs for non-Jordanians and day workers who are typically informal and thus do not count in the labor force, and basically are unskilled.

The growth, alas, was also short-lived. It died right after the construction boom subsided. This is an empirical observation that occurred after every economic boom. Observations from the years that followed 1993 provide ample evidence that proves such a claim.

During 1994-2000, the average economic growth rate was 3.9 percent while unemployment averaged 14.3 percent. Growth had peaked in 1995 at 6.2 percent upon the signing of the peace accords and with the return of aid from the US. But growth fell soon thereafter, in 1996, to 2.1 percent. Again, the growth was not sustainable, and unemployment remained at 13.7 percent throughout almost the entire period. It was another jobless growth.

During 2001-2003, the economy grew by 5.1 percent on average while unemployment was 14.8 percent. Again, regardless of the growth rate, unemployment was in double digits.

The period that followed, 2004-2008, was a golden era as far as the economy was concerned. The economy grew by 8 percent on average. However, the unemployment rate was 13.9 percent, a truly jobless growth.

Again, growth was not the answer to unemployment. Why? Because, again, the economic activity was focused mainly on real estate and the money went into buildings – in fact we overbuilt.

From 2009 to 2012, the growth rate averaged 3.1 percent while unemployment decreased slightly, averaging 12.6 percent, which was an anomaly. The standard argument in economics is that economic growth reduces unemployment. This is not the case in Jordan.

Moreover, in recent years, the low growth was accompanied by higher unemployment rates: during 2013-2019, the growth was 2.4 percent and the unemployment rate was 15.6 percent; in 2020, growth was -1.6 percent and the unemployment was 23.2 percent.

So, is there a relationship between economic growth and unemployment? Yes, it is negative (as it should be) but very weak. For the period, the correlation coefficient is -0.112. In other words, economic growth had very little impact on lowering unemployment.

One solution is to encourage banks to lend to the industry at levels commensurate with those provided to the real estate market. In fact, the government must interfere directly with banks to make sure they increase lending to the industry.

Furthermore, private banks must start to lengthen the repayment period as the industry requires quite a long period of time to start turning a profit.

Additionally, the debate in Jordan must depart from contractionary budgets to lessen the budget deficit to expanding the budget by increasing capital expenditures. What type of projects? Large, productivity-enhancing (transport, energy, and infrastructure) to increase the incomes of Jordanians and the profits of their companies, and hence government revenues, which will be used to pay back the accumulated debt and free the budget of the chronic inflexibility it suffered throughout the past three decades.

With these prescriptions, the private sector would become more attractive to Jordanians than the public sector, and the size of the labor force that is hired by the government would shrink as more lucrative opportunities are availed. Also, Jordan’s brightest, who have moved to the Gulf to work, would come back; there is no place like home.  Let us not wait too long.

https://www.jordannews.jo/Section-36/Opinion/Prescriptions-to-tackle-unemployment-12792

Inflation – should one worry? 14/02/2022

At the beginning of the COVID-19 pandemic, policymakers worldwide acted aggressively to sustain their economies. The global operating view was to sustain the economy and jobs at all costs. One of these costs has been inflation as fiscal and monetary stimulus policies were deployed with haste. Now that inflation has come into play in the world economy, one should wonder about the impact on Jordan.

The eurozone consumer prices had risen by 5 percent by December 2021, and the US inflation rate hit 7.5 percent. The expansionary economic (fiscal and monetary) policies were behind most of the rise in prices (the US, for example, pumped $2.5 trillion in 18 months into the economy), but other factors also played into this. These include supply chains disruptions due to shipping and/or unobtainability of components, refusal to work (unemployment in the US is at 3.6 percent and 2.5 million workers left the job market not wanting to return), and jump in demand for travel (increased by 25 percent in 2021 but subsided later on). Many sources claim that inflation could last for years, not months as originally predicted, as adjustments require more time than initially forecast.

Jordan also partook in activities to downgrade the impact of the pandemic. The main arrangements in Jordan were undertaken by the Social Security Corporation and the Central Bank of Jordan (CBJ). Still, the economy was plagued by higher unemployment rates in 2020 and 2021 than it was in the past 30 years. Meanwhile, the consumer price index in Jordan rose modestly, by 0.4 percent in 2020 and 1.5 percent in 2021.

What would cause inflation in Jordan? Obviously, the cause of inflation in Jordan is not the same as in the US and other countries. Jordan suffered from closures, curfews, furloughs, monopolistic practices, disrupted domestic supply chains, hoarding, and the fact that it is a net importer economy. The latter is extremely important: in the first 11 months of 2021, national exports reached JD5,447 million, while imports reached JD13,821 million; thus, the trade deficit was JD8,374 million. Actually, 87 percent of the average caloric intake and 90 percent of the energy consumed in Jordan are imported.

According to a study done by the CBJ in 2004, 60 percent of the inflation in Jordan is imported. Therefore, it is most likely that the global inflationary pressures will be felt in Jordan while painfully high unemployment rates persist during this year.

The good news is that the government budget for 2022 depends, among other things, on an assumption that the inflation rate in 2022 will be 2.5 percent. This will be achieved and may be exceeded. However, the bad news is that inflation comes with high unemployment. Obviously, consumers will be hard hit, and so will producers, and the government will have to worry about this double vortex.

So, what can the government do? First, it must expand the money supply by lowering the interest rates. Yes, this should hold true even if the US Federal Reserve attempts to curb inflation by increasing the interest rate in the US.

The government in Jordan should lower the interest rate to encourage investment, production, and consumption at lower costs as the cost of borrowing decreases. The cost of energy must decrease further to help businesses become more competitive and help the manufacturing industry and other productive venues return to some form of profitability. Mishaps in local supply chains should be addressed and weak links should be strengthened or removed. Monopolistic practices, which have been drivers of inefficiency in production and consumption, must be curtailed to encourage also greater employment. In fact, there is a host of policy measures to be taken, not to lower inflation (because small developing countries cannot – as the Noble laureate Joseph Stiglitz asserted on many occasions) but to increase employment and, thus, citizen welfare.

The time to act is now.

https://www.jordannews.jo/Section-36/Opinion/Inflation-should-one-worry-13082

Hoping for a more vital economy 21/02/2022

It has become common practice to say that we, in Jordan, are heading the way of Lebanon; that is, what happened there would happen here. This is so far from the truth. Unfortunately, few people know what happened in Lebanon and how the crisis there came about.

Lebanon is undergoing a financial meltdown that is spawning one of the worst economic and human catastrophes in centuries. People have come to witness their livelihoods and savings disappear.

The story began in 1997 when the central bank (Bank of Lebanon), in order to maintain faith in the Lebanese economy, pegged the Lebanese lira to the US dollar (LL1,507=$1). The policy proved successful for a while. A visitor to Lebanon would carry either liras or dollars and have no problem using either. It was a dual currency economy.

But it also meant that banks had to hold large amounts of dollar deposits in order to meet the demands for exchange at any time. Lebanese firms needed dollars to pay for imports, which also increased the pressure on banks to have dollars. Note that Lebanon is a country that relied for foreign currency on three primary sources: remittances from the Lebanese in the diaspora (mainly the Gulf countries), tourism, and aid from the capital surplus countries of the Gulf and the West.

As long as these inflows kept coming, the dollars were available to meet the demand and the economy was relatively stable. However, the Arab Spring changed things: Syria, which was once a large trade partner, was facing financial trouble; remittances started to fall; aid from the oil-rich Gulf countries, for political reasons, started to falter and later came to a halt; tourism, with the promise of violent flare-ups, dwindled to almost nothing; foreign direct investment dried up as the US and others considered Hezbollah a terrorist organization; and the port explosion topped it all up.

With the disruption in dollar inflows, the private banks, with the blessings of the Bank of Lebanon, devised the following plan: private banks are to offer generous interest rates (15-20 percent) on dollar deposits to keep the dollars coming. However, to be able to meet such an obligation, the only way for banks was to pay the initial depositors with money from new depositors, which is better known as a money pyramid or Ponzi Scheme. But once people realized that a Ponzi scheme is at play, they panicked and started asking for their money back, which caused a run on banks. Banks, not having the money, refused to pay, and the conundrum started. Consequently, the lira exchange rate dropped by 90 percent after 2019.

Three events in 2020 did not help matters either: the government tried to impose taxes on WhatsApp calls in a country that is considered the most expensive in the world in terms of telephony; COVID-19 wiped out tourism and any hopes of recovery, and the explosion of the port in Beirut devastated whatever hopes for recovery existed.

So, how similar is this to the case of Jordan? Not at all!

https://www.jordannews.jo/Section-36/Opinion/Hoping-for-a-more-vital-economy-13389

The need to evaluate performance 28/02/2022

Ministerial Cabinets tend to have a short life span in Jordan. Many times the performance is measured by public opinion without quantification of performance outcomes. As such, the provision of key performance indicators has become an absolute necessity. Below are some examples.

A measure of the success or failure of a Cabinet is oftentimes accomplished by comparing the change in the real per capita income (the average income with the inflation removed). It is neither a perfect nor sufficient measure in itself. So, let us look at the period 2009-2018, a fascinating decade.

The reason 2009 is selected is due to the fact that it was the year that followed the 2008 global economic crisis, and the start of the low economic growth rates era for Jordan. 2018 is chosen because it is the end date of the last pre-pandemic government.

In order to make some assessment, the 2009-2018 period is divided into several intervals, the first of which is the pre-Arab Spring and Refugees (ASR) interval, 2009-2011. During those years, the real per capita income was falling at an average rate of 1.8 percent annually. In fact, 2010 witnessed the highest drop (-2.9 percent) in the real per capita income during the whole period (and even in the pandemic year of 2020).

The second interval, which spanned almost four years, 2012-2015 and almost half of 2016, was the interval during which the Abdullah Ensour Cabinet was in office. During that period, the real per capita income was falling by around 2 percent annually, the greatest drop throughout the 2009-2018 period. 

The third interval was 2016-2018, the almost two-year period during which the Hani Mulqi Cabinet was in office. Interestingly, the drop in real per capita income was an average of -0.4 percent annually, the lowest throughout the 2009-2018 period.

Moreover, the annual changes in the real per capita income tell a thought-provoking story. In 2016, the fall in the real per capita income was -1.0 percent – following the Ensour Cabinet, the Mulqi Cabinet had been in office for only six months. In 2017, the drop in the real per capita income was reduced to -0.3 percent, the lowest drop in the real per capita income throughout the period.

In 2018, the negative trend was reversed, the real per capita income was actually rising; it grew by +0.1 percent, the only positive growth rate during 2009-2018, which also signaled a return to positive real growth rates in the average income, a welcome development.

Did the change in the real per capita income come at the expense of a rising or falling debt level? One way to measure the public debt is to compare it to the GDP (that is, the debt-to-GDP ratio) during 2009-2018.

The 2009-2011 interval suffered a growth in the debt-to-GDP ratio from 65 percent to 71 percent. The 2012-2015 interval saw a rise in the debt-to-GDP ratio from 71 percent to 92 percent. During the 2016-2018 interval, the debt-to-GDP ratio held constant at 92 percent.

The above is only a sample of what should be done to evaluate the performance of the various ministerial Cabinets. It is provided as an example of what can be done, which is much more.

https://www.jordannews.jo/Section-36/Opinion/The-need-to-evaluate-performance-13681

Funding industry to help boost economy 07/03/2022

An increase in exports is always welcome news. Recent trade reports indicate that national exports have increased by 20.1 percent and imports increased by 24.2 percent during the first 11 months of 2021, compared with the same period of 2020. However, judging from the list of what Jordan exports and imports, there really is a need for diversifying the industrial and export scope of products.

Total exports (national exports and re-exports) reached JD5,997 million during the first 11 months of 2021, an increase of 18.3 percent compared to the same period in 2020. National exports were worth JD5,447 million during the first 11 months of 2021. They increased by 20.1 percent relative to those of the same period in 2020.

The increase in national exports was due to a rise in the value of exports of clothes by 13.9 percent, fertilizers by 97.1 percent, crude potash by 27 percent, crude phosphate by 44.6 percent, and non-organic chemical products by 9.1 percent. So, after COVID, the world was asking for more clothes and fertilizers — people want to dress and eat better after the closures, curfews, and the macabre spread of the virus and its aftermath.

Notably, there was a 1.5 percent decrease in the export value of Jordanian pharmaceutical products. One could see a falling trend for what was considered a leading industry as Jordanian pharmaceuticals continue to lose traditional markets in the region.

There are many reasons for this steady decline, yet an extensive albeit value-added-focused industrial policy may help reverse the trend.

The imports value reached JD13,822 million during the first 11 months of 2021, an increase of 24.2 percent over the imports of the same period in 2020. There was a 35 percent increase in the value of imports of crude oil and its products, vehicles, motorcycle and their parts by 26 percent, jewelry, and precious metals by 54 percent,  machines, and machinery tools and parts by 18 percent, electrical appliances and their parts by 11 percent and grains by 18 percent.

Note how machinery and tools make a large chunk of Jordanian imports. Even the most casual observer would recommend that the industrial base be expanded and diversified, which is why analysts and pundits received the news of the $85 million Industrial Development Fund with great cheer.

The trade deficit in the first 11 months of 2021 increased to JD8,375 million, or to JD761 million per month. If Jordan wishes to decrease the trade deficit, and if the industry is to diversify and innovation is to set in, more funds are needed.

Jordan will need a plethora of funds beyond this fund, including an innovation fund, an export fund, a creative industries fund, and many others.

Proper cost-benefit studies show that government can recoup their expenditures via these funds; in months and in years, the impact on the economy is manifold. There is no time or reason to wait.

https://www.jordannews.jo/Section-36/Opinion/Funding-industry-to-help-boost-economy-13995

 

Falling remittances should prompt action 14/03/2022

Currently, Jordan is ranked 36th in the world in terms of the ratio of remittances to the GDP. The countries that are ranked higher than Jordan are almost all low-income developing countries, and some are extremely poor.

Remittances from expatriate Jordanians (a workforce of approximately 270,000), mainly in the oil-producing countries of the Gulf, have been a major source of revenue and foreign currency for Jordan. Historically, one of the main reasons the banking industry in Jordan was established was to handle remittances. However, remittances have been decreasing as a percentage of the GDP, which should sound the alarm or at least prompt some policy measures.

Let us look at the data.  In 1972, a year before the October War, the percentage of remittances to GDP was 2.6 percent, the lowest ever. After the October War and the quadrupling of oil prices, the percentage started to rise in an accelerated manner, reaching 21.2 percent of the GDP in 1975 and 24 percent in 1976. After 1976, it began to decline as Jordan’s economy grew at unprecedented rates. The remittances percentage finally bottomed at 18.4 percent in 1980, and then began to rise again, reaching 23.6 percent in 1982.

After two years of a slight decline, the percentage of remittances to GDP rose to 24.9 percent in 1984, the highest percentage ever, as more and more Jordanians returned with their savings due to a global oil glut, thus infusing large amounts of funds into the economy. The disastrous years 1988 and 1989 saw an increase in the percentage that was more likely due to the fall in GDP than an increase in remittances.

After 1989, as would be expected when people are worried about the destination they are sending money to, remittances started to fall as a percentage and continued the slide until 1991. In 1992 the remittances jumped to 15.9 with the repatriation of Jordanians from the Gulf countries due to the invasion and liberation of Kuwait.

Remittances continued to rise thereafter as Jordanians continued to receive compensations for their losses and some began to find their way back into the Gulf countries. The trend lasted until 1994 when the percentage declined slightly, then peaked in 1996 at 22.8 percent after the signing of the peace agreement with Israel. The next peak (22.4 percent) came in 2000, after which the percentage has been dropping steadily. It has been steadily falling since 2014, from a high of 17.3 percent to 8.9 percent in 2020.

Why is it falling? The answer is manifold: some Gulf countries allowed the expatriates to purchase real estate there at low down payments and interest rates, which took the funds away from the Jordanian real estate market; the Jordanian labor force is finding worthy competition from the laborers of other countries, which means that they have to accept lower wages; Jordanian expatriates are purchasing real estate in countries that grant citizenship to property owners (having a second citizenship has become a global trend in recent years); increasingly people are going global in their investment, and real estate is no longer the only option (stocks and cryptocurrencies are others, for example).

One should not however lament the dwindling inflow of remittances; after all, the remittances are a paltry price for the brain drain that induced them. A Jordanian leaving to work elsewhere is akin to plucking a tree from one’s farm and sending it to another to produce there. The exporting farmer loses the effort he had spent growing the tree for the few pennies he acquires from lending it to the neighboring farm which reaps the fruits, packages them, exports them, and as a result, becomes wealthy.

Jordanian talent, unable to find gainful employment at home, cannot be blamed. At the same time, banning such a valuable export is not a reasonable solution. The only feasible and proper answer is to create jobs at home and develop ways and means to cumulate added value from the fruits of the brain power in Jordan. In other words, development is badly needed, and it should be topmost on the agenda. Time to start thinking about a solution. The problem is already here.

https://www.jordannews.jo/Section-36/Opinion/Falling-remittances-should-prompt-action-14273

Addressing the falling foreign direct investment 21/03/2022

Jordan’s foreign direct investment (FDI) ratio to GDP has been falling almost steadily over the last 17 years. Can the recent government measures, such as a new investment law and the Omnibus Law, resuscitate the FDI and bring back the glamour of the first decade of the millennium?

It is a prickly and controversial question, and the answer, at least to some, is polemical.

According to the UN Conference on Trade and Development (UNCTAD), FDI refers to the foreign direct investment that is equal to or exceeds 10 percent of the equity of a company. It is much more valuable than the foreign indirect investment, as the latter may easily flee a country in times of crisis, as happened with the Asian tiger economies in 1997–1998 when indirect investments fled in a herd-like behavior at the whiff of a crisis.

FDI is almost always measured as a ratio of the GDP; the higher the ratio the more successful the economy in attracting FDI. Absolute values in billions or millions of this and that currency are meaningless for comparison purposes, as a large economy typically attracts more FDI than a small one; hence, a comparison in terms of absolute size is not very useful. Comparisons are always made relative to the GDP of a country.

In Jordan, given the available data, which spans almost 50 years (1972–2020), the FDI to GDP ratio tells a fantastic, albeit not so surprising, story. In 1972, the FDI ratio was 0.1 percent of the GDP. This rose steadily after the October War in 1973, to 1.9 percent in 1975, and peaked at 3.2 percent in 1981, beyond which, and until 1996, there was a steady decline in the ratios, not exceeding 1 percent annually. The ratio then rose from 5 percent in 1997 to 10.8 percent in 2000 (mainly due to the privatization of the telecom sector). Immediately afterward, the ratio dropped to 2.5 percent in 2002 and at the time of the first Gulf War rose to almost mythical values, 23.5 percent in 2006, the highest ever. It steadily declined to 5.0 percent in 2011 (the year of the Arab Spring), then rose to 5.9 percent with the impact of Syrian refugees, only to start falling again to reach 1.6 percent in 2020.

One can surmise from this almost sinusoidal movement of the FDI-to-GDP ratio two very important observations: oil prices have had a notable impact on Jordan in terms of FDI, an impact that is becoming less apparent; regional shocks have had a positive impact on FDI flow into Jordan.

Based on the data, a vivid picture of the foreign investor that Jordan attracted can be drawn: Arabic, and seeking refuge in Jordan at the time of a severe crisis at home. 

What is Jordan doing now to attract FDI? The government is changing the legislative framework. There is a Herculean effort to create what is called the Omnibus Law, which requires changing 44 laws and 1,800 by-laws. The Investment Law No. 30 of 2014 is also being revamped, and a new law will emerge to accommodate the new Ministry of Investment, which replaces the Jordan Investment Commission, and the new system of incentives.

Almost a quarter of a century ago, Jeff Nugent of the University of Southern California did a study on FDI inflows to the MENA region. He determined, after testing various factors, that the most important deterrent to FDI in the MENA region is unilateral decision making, whereby a VIP unilaterally decides to change the course of action. Investors do not like that.

In the 1990s, Abdul Karim Kabariti, a truly exceptional Jordanian prime minister, once said: “The government should maintain a balance between legislative stability and modernizing legislation.”

Such a statement should always guide policymakers. It should be a golden rule because, according to the leading business and national strategy guru and innovator of competitiveness Michael Porter, the private sector adjustment time is different from that of the public sector; the former may require months, if not years, to adjust to a decision by the latter.

The new changes may prove useful. However, all the new legislative improvements will not prove fruitful unless the focus falls on implementation (streamlined processes), reducing bureaucratic discretionary power (an absolutely necessary action that can be achieved almost fully through digitization), and revamping the approach to attracting investment (go after the sovereign investment funds with specific large projects ideas, utilize the public-private-projects unit and the Social Security Investment Fund to generate government seeded investment and lower the cost of services domestically).

https://www.jordannews.jo/Section-36/Opinion/Addressing-the-falling-foreign-direct-investment-14570

Combating predicted inflation 28/03/2022

The doomsayers in Jordan are talking about unmatched inflationary pressures that will fully eclipse the economy. The highest unemployment rate in 30 years coupled with the inflation and its predicted magnitude, which although not really known is already tagged as “huge”, makes for an unwelcome combination.

But while the scapegoats and branded bearers of the blame for the inflation are arguably the merchants (importers, distributors, wholesalers, and retailers), the responsibility should be borne by all, as should the obligation to act to curtail some of the forecast inflation-unemployment nexus.

The predicted inflation could be attributed to developments in the global arena. The disruption of supply chains around the world as a result of the pandemic, which caused significant upsurges in the cost of production, slowdowns in delivery, and even work stoppages, is already old news. In addition, demand increased in the developed countries where central banks and treasuries flooded the markets with liquidity and facilitated access to finance, which resulted in huge inflationary pressures.

Furthermore, millions of workers in the developed economies have voluntarily opted out of the labor market in search of a more meaningful life beyond work.

A new reason for the rise in inflation worldwide is the Russia-Ukraine war, which is causing the prices of commodities to rise worldwide.

Jordan, which imports 87 percent of its caloric intake and 93 percent of its energy needs, is of course highly vulnerable to global increases in commodity prices.

The design of relief should take into consideration several factors. The rise in food prices will overwhelmingly affect the poor more than the rich, as the former spend a larger share of their incomes on food than the latter. Hence, any policy aimed at reducing the impact of the predicted inflation should focus on the welfare of the poor first.

Those whose incomes are fixed and consist mainly or solely of wages are more likely to be worse hit than the rich whose incomes are generated by their assets, which increase (at least partially) in value with inflation, making the return and their total income increase as well.

The resolution of distressed loans that resulted from COVID-19 and the containment policies of the government should be delayed to avoid the social cost of debt distress. Wider access to credit should be encouraged since Jordan is not in a high inflation period like the developed countries, and businesses and people in Jordan have been spending from savings, not from income.

Lowering customs duties, taxes, and fees on basic commodities should be a policy tool. Reducing the cost of energy by as much as possible by taking away some of the special taxes to counter the global price increase should be a possibility.

The government must also conduct its own research into the components of any price hike. That is, it should be able to dissect the components of the price and determine the percentage of the hike that is due to global factors and the percentage that is due to collusive behavior. Should the price rise of a commodity be due to implicit or explicit collusion, Article 5 of Competition Law No. 33 for the year 2004 should be invoked. The proof of collusion would be relatively easy. If the large importers move in a coordinated or semi-coordinated manner, this would be evidence of collusive behavior and should trigger a deeper probe.

In short, the inflationary damage, with its gale of damage to welfare, should not happen in Jordan. The economy has already been badly hit by the pandemic, but while economic policy played second fiddle to the medical crisis, it need not continue to do so.

Let us not be “surprised” by the predicted inflation.

https://www.jordannews.jo/Section-36/Opinion/Combating-predicted-inflation-14865

The mismatch paradox 04/04/2022

When analyzing Jordan’s unemployment problem, some tend to place the blame on the labor force itself, especially university graduates. The pundits claim that academic training (understood by most to mean the type of degrees or academic specializations) acquired by Jordan’s youth does not match the market demand, which may be true, but not for the typically claimed reasons.

To illustrate, one often hears the statement that there are too many engineering graduates every year, yet the market for engineers has a glut and, consequently, unemployment among engineers continues to grow; thus, unemployment is caused by a mismatch between degrees and market demand.

Few, however, address the quality of the training or schooling received as a reason for not hiring recent graduates, regardless of the field of study. It is widely recognized that the three most important skills (critical thinking, communication, and teamwork) are not taught at most universities and public schools in Jordan. In actual fact, it is the quality of education, not the type of education, which makes employing these graduates less attractive to employers.

Nevertheless, the mismatch argument has gained popularity in recent years. The mismatch argument brings to mind the culture of shame argument (CSA), which was launched in the mid-1990s and went on to dominate the unemployment discourse for over two decades — some still use it, even though it has eventually died down.

CSA claimed that Jordanians refused to work in several professions because of an excess of pride. Others could do these jobs, but Jordanians would be ashamed to do them. Hence, they were voluntarily unemployed, and consequently, unemployment rates were high. Of course, a policy maker could do nothing to employ such a proud workforce.

Unquestionably, there was no researched proof or empirical evidence that justified such an argument. Nonetheless, it was popular among government officials and their pundits because it shifted the responsibility for the rising unemployment from the government to the governed.

Some employers saw in it a suitable rationalization for their hiring preferences: cheaper, informal foreign labor. Even the labor force, especially the youths anticipating a government desk job, saw in it an apt validation for their refusal to work. Such a win-win-win unsubstantiated claim became everybody’s darling.

Note that both arguments place the burden of unemployment on the labor force. Disregarded are the roles of the public and private sectors. Never mind that the public sector could have reduced its appetite for labor over the past few decades and thus would have helped nudge and shift the demand for jobs more toward the private sector. Moreover, so many negatively impacting policies could have changed to improve the situation, such as the removal of market segmentation and ad hoc ordinances, among others.

As for the private sector, there is ample room for improvement. It is dominated by small firms which make up over 96 percent of enterprises. They employ 60 percent of the labor force and contribute 24 percent of GDP- compared to 70-80 percent in a developed economy.

Also, Jordan suffers from the “missing middle” - a lack of semi-skilled workers. There are few medium-size firms and small firms do not grow into medium-sized due to, among other things, lack of access to formal financing, which in turn encourages the growth of informality.

Furthermore, not only does the private sector not create enough jobs, it does not create enough high-quality jobs, and even when the odd firm seeks highly skilled workers, it may have a hard time finding them as the best and brightest have moved to the Gulf countries.

Promising sectors such as ICT, pharmaceuticals, and health tourism, having challenges in terms of upscaling, tend to move to places like Dubai, and recently Saudi Arabia, where hindrances are fewer and markets are larger.

 Startups create very few informal jobs and face many obstacles. The majority are established not out of rushes of ingenuity but out of the necessity of securing a livelihood.

Jordan is a small open economy that is heavily dependent on the public sector in terms of job creation. For the labor situation to change, the private sector must grow and thrive to attract Jordanians away from government employment opportunities, as a solitary or most viable option, to higher pay, greater learning, skill, and personal growth in the private sector.

Slogans and excuses are only numb the drive to come up with solutions.

https://www.jordannews.jo/Section-36/Opinion/The-mismatch-paradox-15163

Are Arab governments taxing the poor more? 11/04/2022

Two weeks ago, The Economist published the article “Arab governments are putting more taxes on the poor”, in which Jordan was mentioned among other Arab countries.

Unlike other articles by The Economist (which was established almost 180 years ago), as an economist, I found the piece incomplete in regard to Jordan (and it mentioned it a lot), and that it may have committed an error or two when analyzing taxes.

While one agrees with the conclusion that some Arab countries may be taxing the poor to increase revenues, based on the fact that the sales tax is regressive (it affects the poor more, proportionately than the rich), the first rule when assessing a type of tax is to relate it to all other taxes and not look at it in isolation.

For example, it would be incorrect to state that Jordan is better off than Finland because the general sales tax (GST) is 16 percent in Jordan and 24 percent in Finland. The reason is that unlike in Jordan, in Finland there is zero income tax on individuals and the tax rate on corporations is 20 percent. Both tax types are lower in Finland than in Jordan. Besides, it is rumored that Jordanians pay over 130 types of taxes, for TV, airport, border, asphalt, mobile, built space, university, etc. This was not observed in the article.

The analysis is also lacking when it does not compare the taxes paid to the benefits received in each country. After all, taxation is the tool by which the government endeavors to become a Robin Hood, taking from the rich to help the poor.

To compare the value received from the government, I would refer to the World Happiness Report, published by the Sustainable Development Solutions Network, which ranks 146 countries in terms of happiness. In 2022, according to the report, Finland came 1st and Jordan came 124th, to use the same country by way of comparison.

Furthermore, an article in The Economist referred to income taxes in Gulf countries as if they were the same as countries in the developed world. In the Gulf countries, the government owns the oil and distributes some of its revenues among the people. In the US, for example, a person can own their own oil well(s).

The article also failed to look into the size of fees that are being charged without being tagged as taxes. In Jordan, non-tax revenues (the vast majority of which are fees) are almost JD2 billion, or 25 percent of total domestic revenues. Had the authors of The Economist article bothered to look into the local story of the taxes and fees paid, I am sure they would have written a different piece.

When analyzing taxation in Jordan, I simply divide the government's domestic revenues (less revenues from its shares in corporations and interest it receives on loans) into the GDP. As it turns out, the ratio of taxes and fees to GDP is around 30 percent, and it has hovered consistently around this rate for some time now.

The main lessons to be gleaned from this article are: whenever possible when analyzing an economy, one should know the local story; rules and standards should not be sacrificed to justify an end or prove an argument; use simple tools, for, in spite of everything, good economics is based on common sense. No common sense makes bad economics.

https://www.jordannews.jo/Section-36/Opinion/Are-Arab-governments-taxing-the-poor-more-15447

Of labor policies and jobs 18/04/2022

It is true that the Ministry of Labor is not responsible for creating jobs, but it is also true that it can destroy jobs through labor policies that make it difficult to match workers to jobs and prevent the economy from leveraging the labor force at hand.

One of these destructive policies has been the labor segmentation policy (dividing the labor market into separate segments that are distinguished by different characteristics and behavioral rules), which had been a favorite of almost all recent labor ministers.

One of the main features of the labor market vagaries observed over the past 50 years throughout the world relates to labor market segmentation. If it exists, it should be based on educational attainment or skill endowments. It should not be based on nationality, gender, sector, and legal status.

Studies since the 1970s have addressed, with a variety of tools and theorems, the many negative effects of segmentation. The negative economic and social impacts of the latter segmentation types are numerous: wage gaps among segments, variances in access to training and social security, different working conditions and tenure; restricted access to jobs; absence of promotion to better jobs; lower productivity; higher unemployment; employment instability; and greater informality. Many of these are present in the labor market in Jordan.

In Jordan, the creation or the expansion of a new segment in the labor market is done without any serious study of the economic or social impact. And while economic reform efforts under the purview of the IMF have focused on removing distortions (segmentation) in the tax system, discord and mayhem in the labor market continue unabated through distortionary segmentation policies.

In fact, a former minister of labor boasted (as have others) that by closing certain professions to foreign workers he was creating jobs for Jordanians, which was a bogus claim at many levels, as unemployment continued to rise even after.

It is not necessarily true that Jordanians would want to or are able to replace the guest workers in some of the closed segments. Research has shown that Jordanians seek working conditions that provide regular and timely payment, compensation for overtime work, predictable working hours, and jobs that require skills rather than manual labor.

Impromptu closure of sectors makes it difficult for employers to guarantee one-year, full-time work contracts for foreign workers, which encourages the growth of the informal sector.

A formally segmented market makes it difficult for labor to move across markets, and thus increases the cost and reducing the productivity of labor. Segmentation by driving away guest workers from certain professions also leads to increasing costs for producers at a time when the high costs of energy, high-interest rates, transportation, and taxes (direct and indirect) stifled businesses in Jordan and chipped away at their competitiveness — the loss of around 3,000 industrial companies in three years is ample testimony to this.

“Insanity: doing the same thing over and over again and expecting different results,” Einstein once said, Labor market policies have been unchanged for decades, and the unemployment rates have not ebbed. but increased to previously unseen heights. Is it not time to change your thinking?

https://www.jordannews.jo/Section-36/Opinion/Of-labor-policies-and-jobs-15742

Rumors, pessimism, lies and their cost 25/04/2022

Not a week goes by in Jordan without a rumor or a semi-learned exposition spelling negativity spreading over social media.

The spread of social networks has given platforms to the voiceless, and basically everybody with internet access. It also enables individuals to spread false information, rumors, conspiracy theories, and baseless claims, which thrive in an environment of information uncertainty.

Social media platforms such as Facebook, Twitter, WhatsApp, and Instagram enable users to build an e-community that alienates some through filter bubbles (an intellectual isolation that results when a website algorithm selectively guesses what information users would like to see based on information about their location, past click-behavior and search history).

It has been argued in the pertaining literature that uncertainty lowers public expectations and fosters pessimism. Losing optimism and espousing pessimism is not without a price, for these two feelings move supply and demand faster than any other development.

Negative statements and news spread real fast. A recent study of data on Twitter during 2006-2017 showed that 3 million people spread 126,000 rumors, and false news reached more people and diffused faster than truthful ones;  the top 1 percent of false news  diffused to between 1,000 and 100,000 individual accounts, whereas the truth seldom spread to more than 1,000.

The impact of false news and pessimistic rumors about the social, political, and economic spheres cannot be but negative. It not only sabotages the welfare of the nation, it also derails any attempt at reform as trust between the government and the people erode.

Studies show that negative rumors, coupled with social media, often produce undesirable consequences. For example, in a small town in Mexico, in August 2018, a WhatsApp rumor claiming that child abductors were collecting human organs led to a vigilante mob of more than 100 people burning two men alive.

A growing body of research shows that humans tend to prioritize negative over positive news. According to Stuart Soroka, a UCLA communications professor, humans may neurologically or physiologically be predisposed to focus on negative information because the potential costs of negative information far outweigh the potential benefits of positive information.

This view is also asserted in the field of behavioral economics. There is ample evidence of people’s bias in favor for negative over positive news in Jordan. All one has to do is to release news of doom and almost everyone will start quoting and spreading the falsity. 

Rumors and misinformation flourish with the spread of social networks and situations where there are high uncertainties and ambiguities. The economy, with its multitude of issues, and being a highly complex and dynamic system that is constantly and continuously affected by new inputs, is the field most impacted by rumors and misinformation.

The economy and its markets, show more than any other field such incidences of self-fulfilled prophecies. If enough people state that an economy will collapse, it will collapse. Financial markets that are highly speculative can become rife with rumors and misinformation that lead to unfounded assertions and costly decisions.

The same is true for organizations and institutions.

Surprisingly, when someone starts a rumor about the economy, very few in Jordan attempt to counter its claims, and even fewer voices come out from the public sector, which is not surprising. One reason is that decision makers may not be yet aware of the power of social networks; another, less likely, reason is that they do not know how to address the falsities; and a third reason could be pure lack of concern, (this is not my business, let someone deal with it).

No matter what the reason is, this is a new area that requires new thinking and fast action. The sooner the better.

https://www.jordannews.jo/Section-36/Opinion/Rumors-pessimism-lies-and-their-cost-16013

Why copy the Federal Reserve? 10/05/2022

With a recession becoming almost a reality in Europe and the US, a legitimate question to ask is whether the economy in Jordan will soon face stagflation (inflation coupled with unemployment).

The Central Bank of Jordan (CBJ) recently increased the interest rates on all its instruments to counter, according to published statements, the impact of otherwise imminent inflation. Within hours of the CBJ's decision, private banks in Jordan raised the interest rates on loans. The merits and demerits of the inflation-unemployment vortex are hardly debated in Jordanian public fora.

The view that inflation causes as much misery as unemployment is flawed and has recently been proven so. Arthur Okun, the renowned economist, and Noble Laureate believed that inflation and unemployment created the same levels of misery; hence, he created the “Misery Index” in the 1970s, which is the sum of the unemployment and inflation rates.

This view was challenged in 2013 by the work of David G. Blanchflower, of Dartmouth College, and three of his colleagues. The finding based on surveys is that while inflation is bad, it is nowhere as bad as unemployment, with the latter being much worse. Therefore, current economic thinking is that unemployment is a worse evil than inflation.

Before COVID-19, the world economies were facing deflation, not inflation. The same was true for Jordan. Sector lockdowns, disrupted global supply chains, persistent reduction in labor supply in advanced economies, the recent closure of major economic hubs, such as Shanghai, the new cold war between the US and China, sharp energy price spikes, and the recent Russia-Ukraine war are all fueling inflation.

In addition, countries like the UK, US, and Germany, among others, have pumped massive liquidity into their economies to sustain businesses during the pandemic and reduce the negative impact on employers and employees, which created a fertile ground for high inflation rates.

In the US and Europe, the drive is to increase the interest rate in order to make it more expensive to borrow and spend, which in turn would reduce the inflation rate. Given that the interest rates in these economies have been close to zero for a long time, and given the low unemployment rates they enjoy, such a policy seems to make sense. However, even in these economies, it is understood that fighting inflation comes at a cost.

The experience of Paul Volker, the Federal Reserve chairman in the early 1980s, illustrates a policy taken to the extreme. Faced with runaway inflation, he raised interest rates to historic highs (from 11 percent to a record 20 percent) by late 1980; the price of conquering double-digit inflation was the recession.

In Jordan, the monetary policy was not as expansionary as in the developed economies, and the fiscal policy, ever strapped by an enduring fiscal inflexibility (budget deficit and debt), could not do much either.

Inflation comes to Jordan thus not from an excessive money supply but from the negative supply shocks that rocked production worldwide, which affected the cost of imports, which, at JD13,822 million in the first 11 months of 2021, was two and a half times the national exports.

Furthermore, unemployment stood at 24 percent (almost 50 percent among the youth), and growth in 2021 was 2.2 percent at constant prices. Nevertheless, inflation, as measured by the consumer price index, in April 2022 was not that significant: 2.47 percent. 

Contrary to widely circulating assertions, Jordan is not facing an inflation rate that warrants such drastic steps as raising the interest rate by 0.5 percent. Even if this is a precautionary step, prices did not rise because of an oversupply of money but because of the rise in the price of imports. So, the rise in interest rate will not curb the inflation rate.

Furthermore, the claim that the economy has recovered to pre-pandemic levels hides the fact that even if true, the pre-pandemic rates were those of a long-drawn recession; they are not desirable at all.

Most likely, increasing the interest rates would further weaken the economy and not strengthen it, as it will lead to a higher cost of money, which will make investing and consuming less attractive.

The truth of the matter is that historically, the CBJ raises and lowers its interest rates in complete tandem with those of the Federal Reserve. There is no new policy here. The reason for such steadfastness in copying the Feds is the myth that maintaining a vigorous margin between the rates on the US dollar and the Jordanian dinar stops dollarization. But the margin has grown over the past 20 years. Furthermore, and I repeat herein a claim I made 22 years ago, this margin is not supported by an empirical study or studies that prove its “sanctity”.

A simple econometric exercise would easily show that Jordanians hoard dollars when the economic growth is weak and are encouraged to maintain dinar accounts when the economic growth is strong. The higher interest rates on the dinar deposits only work in attracting dinar deposits when the economy performs well. The impact is that of icing on a cake. The margin, however, does not work when times are bad.

The upshot of all this is that we need not fully match the Federal Reserve's actions regarding the rate of interest. There is some leeway and it should be used, especially when the economy needs to grow to curb unemployment.

https://www.jordannews.jo/Section-36/Opinion/Why-copy-the-Federal-Reserve-16452