Clash of the monopolies - 28 August 2023

The recent dispute between two associations, the Jordan Insurance Federation (JIF) and the Jordan Medical Association (JMA), has garnered substantial attention from the media and the public. Physicians threatened to decline patient care until the matter was resolved in their favour. Under mounting public pressure, the government, represented by the Central Bank of Jordan (CBJ) as the regulator of the insurance sector, and the Ministry of Industry, Trade and Supplies (MOITS), home to the Competition Directorate responsible for safeguarding competition (not necessarily competitors) in the Kingdom, has stepped in to mediate.

Inflation and rising living costs

The Insurance Federation asserts that the JMA is proposing a 400% increase in physicians' fees. In contrast, the JMA counters with a 30 to 40% increase, attributing the decision to inflation and rising living costs. In response, the government has established a committee after engaging with both parties, aiming to find a middle ground.

The problem and its solution is unclear

However, the problem and its solution seem unequivocally clear. An examination of the Law Amending the Competition Law No. 12 for the Year 2023 highlights Article 6, which prohibits institutions with a dominant market position or significant market influence from abusing this power to impede, limit, or obstruct competition. The term "dominant organization" is defined as one capable of controlling or affecting market activities. This raises the possibility that fee setting could defy the law.

They risk becoming cartels
Another pertinent article is Article 20 (Paragraph 3-C), which directly pertains to the case at hand. It prohibits any association or private sector entity responsible for regulating or advocating for economic or commercial establishments from making decisions that breach competition regulations, restrict competition, or violate the provisions of this law and other legislations. Such actions incur penalties. This makes it illegal for associations, regardless of their nature, to establish prices for their members' services or outputs. The same rule applies to all associations; otherwise, they risk becoming cartels (effectively monopolies), as prohibited by Article 5 of the Law. Additionally, Article 8 A, 1, prohibits entities like producers, importers, wholesalers, or service providers from imposing a lower limit on resale prices.

It can be argued that no association or society possesses the right to dictate prices for its members. From an economic perspective, uniform pricing across the board leads to inefficiency, making discriminatory pricing a better alternative. The market, guided by skills and reputation, should determine who earns more or less among physicians, rather than the decision of an association.

Out of touch
Regarding inflation, the total price increase since 2008 stands at 6.67%, far from the claimed 30 to 40%, making significant fee hikes unwarranted. Moreover, the growth rate, whether nominal (Factoring in inflation) or real values, remains low, rendering any discussion of substantially raising prices for essential services out of touch with current circumstances.

Published in Jordan News: 

https://www.jordannews.jo/Section-36/Opinion/Clash-of-the-monopolies-30562

 

Checks and economic growth and decline 19 August 2023

Reports show that the number of checks circulated in Jordan has declined steadily over the period of 2018 – 2020, and started to rise again, but at a very slow rate, in 2021 and 2022. Given that checks are the preferred debt payment method in the country, it is worth investigating the reason(s) behind this rise and decline, whether there is an emerging trend, and if so, can this information be of use to analysts and policymakers.

 According to the Central Bank of Jordan (CBJ), the number of checks has declined from 16.18 million (numbers are rounded) in 2018 to 14.27 million in 2019, and 10.1 million in 2020.  The number of checks rose thereafter slightly to 10.17 million in 2021, and 10.27 million in 2022.  Hence the use of checks has declined significantly over the past five years by about 58 percent.

Looking at 2023, one notes that the number of checks has risen in the second quarter (1.59 million) relative to the first quarter (1.55 million checks). The total value of checks in circulation is JD9.77 billion in the Q2 of 2023, up by JD499 million from Q1 of 2023. The value per check has also increased from JD592 to JD614.

As to bounced checks, the number has decreased in absolute numbers from 51800 checks in Q1 to 50600 checks in Q2; however, as a percentage of total checks, there was a slight increase from 0.334 percent bounced checks to 0.375 percent. The good news is that the value per bounced check has declined from JD6158 to JD4916.

One possible explanation for the decline in the use of checks provided by the CBJ is that alternative and more efficient payment methods to checks have grown in popularity in recent years. Hence, according to this explanation, the dominance of checks as a means of payment is finally being challenged in Jordan. But the negative trend stopped after 2020 as the number of checks began to increase, albeit at a slow pace. How can one explain such an anomalous trend using the simple explanation provided by the CBJ?

There may be another less conspicuous reason for such a pattern. In the years 2018 – 2020, the per capita income in Jordan declined by 0.5 percent in 2018, 0.5 percent in 2019, and 3.7 percent in 2020. It’s also important to note that 2020, where the greatest decline in check usage occurred, also saw the most significant decrease in per capita income. On the other hand, 2021 and 2022 were years of positive growth in per capita income, 0.2 percent and 1.3 percent respectively, and also witnessed a slight rise in the number of checks in circulation. Consequently, one could deduce that the number of checks in circulation per year correlates with the per capita income in Jordan, a correlation worth pursuing.

Given that data on the number and value of checks in Jordan is readily available, while the per capita income takes longer to estimate, it is worth using the number and value of checks as coincident indicators to predict the direction of the economy. The ease of determination makes such a tool almost a costless planning instrument that provides readily available indications of the direction of the economy.

Published on Jordan News:

https://www.jordannews.jo/Section-36/Opinion/Checks-and-economic-growth-and-decline-30408

Jordan’s decreasing inflation rate: celebration or more work ahead? 14 August 2023

Let us dig deep into all of its impacts and implications 

Recently, there have been calls in the media by officials and some columnists to celebrate the decline in the inflation rate in Jordan. Yet, the complexity of the issue is not being addressed in most of what is being published.

Jordan: A mixed economy

Jordan possesses a mixed economy, amalgamating various private freedoms, centralized economic planning, and government regulation. It has recently been reclassified as a low-middle-income country. Additionally, the economy is small and reliant on foreign loans, international aid, and remittances from expatriate workers.

From one school of economic thought to another
One can also assert that, over the years and depending on the prime minister in office, the type of economic interventions and instruments offered by the government swing from one school of economic thought to another.

Furthermore, the economy is viewed as an open economy with a small production base. Consecutive governments, without providing substantial support to businesses and the manufacturing sector in particular, have hastily entered into numerous trade-liberalizing agreements. This has been done at a pace surpassing that of many other countries.

Measured by consumer prices

In economics, inflation is defined as a rise in the general price level of goods and services in an economy, which constitutes a crucial aspect of macroeconomic governance in any economy. The inflation rate in Jordan, as measured by consumer prices from 1970 to 2022, has ranged between -0.9 percent and 25.7 percent, with an average annual inflation rate of 5.8 percent. In 2022, the inflation rate was 4.2 percent.

Interestingly, when inflation is high, the Jordanian Dinar purchases fewer goods and services, thereby diminishing the purchasing power of money. Conversely, when prices fall (referred to as deflation), consumers may choose to wait and spend less in anticipation of further price reductions. This phenomenon can be observed in Jordan regarding real estate purchases. Even as real estate prices have declined, people seem to delay purchasing real estate in anticipation of future deflationary pressures.

Inflation is brought about by three types of variables, which are not mutually exclusive and may occur simultaneously. The first is demand-pull inflation, which arises when buyers' aggregate demand exceeds the productive capacity (aggregate supply) of a nation. This type of inflation can be caused by easy money and low-cost liquidity, often due to low-interest rates. The second type is cost-push inflation, which pertains to increases in the prices of inputs such as wages or commodities necessary for production, like energy and equipment.

A third type of inflation: Expectations
The third type is inflation expectations, wherein people's anticipation of higher or lower future prices results in present price increases.

In Jordan, one can readily argue that the economy's openness and the limited scope of its industrial base have significantly impacted inflation. Jordan imports 87 percent of its caloric intake and 93 percent of its fuel demand. Historical data spanning 1970 to 2022 demonstrates a strong positive correlation (91 percent) between inflation in Jordan and global inflation; that is, prices in Jordan move in conjunction with world prices 91 percent of the time. Similarly, prices align with those in the EU and the US at rates of 65 percent and 64 percent, respectively.

It is important to note that economists prefer a low (though not zero or negative) and steady inflation rate, particularly since it affects salaried employees by eroding the purchasing power of their fixed incomes. This, in turn, could expedite the onset of a recession as aggregate demand dwindles. However, Jordan presents an interesting case once again.

Allowing wages to easily adjust to inflation
A substantial portion of wages in Jordan are non-contractual (informal), allowing wages to easily adjust to inflation. According to the International Monetary Fund (IMF), the informal economy in Jordan accounts for 26 percent of the economy's size. In terms of employment, 46.1 percent of workers hold informal jobs.

Consequently, only 54 percent of workers (those formally employed) are directly and adversely impacted by inflation, experiencing wage stickiness.

The remainder may require immediate adjustments based on their employment type. Unfortunately, the Employment Cost Index (ECI), a quarterly economic series delineating labor cost changes for businesses, is not measured in Jordan. Otherwise, it would provide an estimate of the impact of inflation on labor costs.

A surge in capital costs
Despite all of the aforementioned points, one certainty remains: with over 90 percent of formal credit acquired from banks, elevating borrowing costs raises production expenses due to the surge in capital costs. This, in turn, affects consumption, especially for significant purchases. In other words, both Jordan's aggregate demand and supply will decrease at a time when the country is grappling with a prolonged recession and one of the world's highest unemployment rates.

So, before one begins to celebrate the declining inflation rate, conducting thorough research by trained economists is advisable. After all, Jordan exports talent, and its economists make positive contributions to institutions worldwide.

Published in Jordan News:

https://www.jordannews.jo/Section-36/Opinion/Jordan-s-decreasing-inflation-rate-celebration-or-more-work-ahead-30296

Jordan needs an industrial policy - 05 August 2023

The economic debate regarding the effectiveness of industrial policy is at an all-time high. An industrial policy is usually a set of actions that combine and coordinate government efforts to bolster economic activities in one or more sectors of the economy. They could include strategic protection of certain industries, government subsidies, direct public sector investments, tax holidays and breaks, supply-chain resilience, job creation, better-paying jobs, greening the economy, etc.

After having been shunned for decades due to the pervasiveness of neoliberal demagoguery, and the focus of analysis on import duties, there is currently a growing prevalence of industrial policies. Furthermore, as in the past, the pursuance of such policies is led by the countries of the global North.  It is time that Jordan devises and implements an industrial policy.

International examples
The Biden Administration issued legislation last year that would pump over a trillion dollars into the economy with a focus on innovation, technology, IT, green economy, and infrastructure. The legislation, which intends to syphon investment out of other countries, create new jobs in the US, and maintain its innovative and experiential global leadership is camouflaged in a legitimate sounding cloak of creating a greener economy.  

But the US is not alone, the European Union is introducing similarly protective legislation on semiconductors to increase the EU’s share in global chips production capacitors. China also aims to boost its high-tech manufacturing. Furthermore, the World Economic Forum believes that industrial policies will have a significant impact on the global economy in the coming years. 

Economic wars
Although industrial policies may trigger economic wars reminiscent of the 1930  Smoot-Hawley Tariff Act, a United States law that raised import duties to protect American businesses and farmers. The result was severe retaliation by many foreign governments. China is already imposing its protective measures on semiconductor sales in response to the recent US deglobalizing actions.  

There is almost a consensus among economists that industrial policies will deepen geo-economic rivalries and tension, and, if they become widespread, reduce competition in some areas as countries attempt to monopolize certain industries or products, relocate economic activity and increase sovereign debt.

However, some believe that industrial policy will also increase innovation. Moreover, the success of so many countries that adopted industrial policies underscores their effectiveness in pushing the development of economies that adopt such policies.

Jordan’s case for innovation
Jordan needs to have an industrial policy with an emphasis on innovation. Why innovation? Because innovation is the vehicle for enhancing productivity, productivity increases the incomes of workers, business owners, and government—and they all need a boost right now. Furthermore, innovation attracts foreign investment and investors as well as domestic investment; thus investment promotion is more likely to succeed in economies where productivity is growing at a fast pace.

Alas, currently Jordan’s score on the Global Innovation Index (GII) in 2022, ranked 78 out of 132 countries, is no cause for celebration. Jordan is weakest in infrastructure, ranked 100, and not doing so well in human capital and research, at 76th place, in business sophistication it ranked 75th, knowledge and technology outputs, 76th again, and creative outputs, 78th. Hence, the industrial policy that should be adopted must be mission-oriented with innovation enhancement being at its core. Otherwise, the necessary innovation solutions will not happen, and productivity will remain stymied.

Resources should be reallocated to funding innovation whereby the government finances research that is done by the private sector.  The success of the research can be availed to the private sector for developing and commercializing its results under special conditions that ensure its spread throughout the economy.

Published in Jordan News:

https://www.jordannews.jo/Section-36/Opinion/Jordan-s-decreasing-inflation-rate-celebration-or-more-work-ahead-30296