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
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