Busting economic myths, Jordan does not consume more than it produces 10 July 2023

International development organizations such as the World Bank and the IMF often claim that Jordanians consume more than they produce, raising concerns about the economy's sustainability. However, historical data contradicts this claim, demonstrating that it is not always the case.

Let us examine the historical data using the ratio of final consumption expenditure (household and government) to GDP, as provided by the World Bank. From 1976 to 1985, this ratio stood at 113 percent, driven by aid inflows and rising incomes in the oil-producing Gulf countries. In 1986-1989, the ratio was 100 percent, indicating a balance between expenditures and income. Toward the end of this period, expenditures were even lower than income (99 percent and 95 percent in 1988 and 1989, respectively). From 1990 to 1999, consumption relative to GDP was 95 percent, consistently lower than income. In the period from 2000 to 2019, consumption accounted for 98 percent of income.

Jordan is not consuming more than it produces
These findings indicate that Jordan is not consuming more than it produces. However, the country's spending has a limited impact on labor productivity, resulting in a decline in per capita income. Recently, the World Bank downgraded Jordan's classification from upper middle-income to lower middle-income, attributing the change to adjustments in population estimates used to calculate per capita income.

Thus, earning Jordan the dubious honour of being the only country last year whose classification has been downgraded.

Proves to be harmful
Government consumption expenditure not only fails to enhance productivity and competitiveness but also proves to be harmful. Why? Because it is pro-cyclical, increasing during times of high private demand and decreasing during low private demand, contrary to John Maynard Keynes' counter-cyclical theory.

The recent 2.8 percent increase in GDP in the first quarter should not be cause for celebration. It should be compared with the first quarter of 2022 when growth was 2.5 percent, rather than the fourth quarter. Additionally, the growth is not attributed to government economic policies, decrees, strategies, or actions. Instead, it is primarily driven by government services and the banking sector, which does not indicate a significant recovery.

So, the famous phrase uttered by the Noble Laureate economist Milton Friedman “We are all Keynesians now,” which refers to the government’s involvement in the economy to spur total demand in times of low economic activity, does not apply to Jordan. In fact, in Jordan, we are not Keynesian now, we were never Keynesian and looks like we are not likely to become Keynesian any time soon.

In conclusion, Jordan needs to fit the Keynesian economic model, which emphasizes government intervention during periods of low economic activity. The country has never adhered to this model and is unlikely to adopt it in the future. Can we change this paradigm? I hope that we can, instead of the eat, pray, and love version we are going with now.

Published in Jordan News:

https://www.jordannews.jo/Section-36/Opinion/Busting-economic-myths-Jordan-does-not-consume-more-than-it-produces-29655