According to a recent publication by the World Bank, global growth is projected to fall from 2.6 percent in 2023 to 2.4 percent in 2024. Developing economies are projected to grow by just 3.9 percent, and low-income countries should grow by 5.5 percent. Jordan’s economy is expected to grow at 2.6 percent in real terms, and inflation will be 2.5 percent, thus making the nominal growth rate 5.1 percent. However, the attack on Gaza may bring economic growth down to 2 percent, and the advice of the IMF, which is basically to cut government spending, needs to be shunned if growth is to increase beyond such a dismal rate.
Governments in developing countries often adopt procyclical fiscal policies that exaggerate peaks and troughs. In general, in good times, procyclical fiscal policy (increased spending or lowered taxation rates) tends to overheat the economy; that is, it causes inflationary pressures, especially when the economy is at or near its capacity. In bad times, it deepens the slump by decreasing demand, thus worsening production and increasing unemployment. Understandably, procyclicality is 30 percent stronger and 40 percent more explosive in commodity-exporting developing countries than in other developing economies.
One possible explanation for adopting such an erroneous policy is rentierism, whereby governments purchase the loyalty of interest groups or individuals through economic rents. Countries that sell commodities are, by definition, also rentier (the commodities were simply there for them to generate revenue). In those countries, rent cascades from the top to the bottom of the economic pyramid, which also derails the cyclicality of the economy and the speed of the transformation of processes from the incipiently simple to a more advanced, highly competitive, and developed economy.
While procyclical fiscal policies are associated with commodity-exporting countries, Jordan’s commodity exports hardly qualify it as such. However, Jordan continues to adopt a policy of fiscal procyclicality. One explanation is that Jordan is a rentier or semi-rentier economy because, over the years, it has been one of the highest aid recipients per capita in the world and has, over the years, subsequently become aid-dependent. For the most part, aid is not reliant on global commodity prices but on political relations. Hence, maintaining the status quo is built into the economic landscape, which can best be tagged as one that aims to preserve the status quo.
Yet preserving the status quo (a procyclical fiscal policy) has a price. The government, any government in this case, in such a state of affairs need not worry about economic growth because aid can make up for shortfalls and deficits. All that is needed is a perpetuation of aid or further aid. But that in itself is short-sided, as aid may become a victim of a convoluted global economy where politics shift allegiances and convert friend to foe, leaving the aid-dependent economy at the mercy of other countries and economies.
Moreover, maintenance of the status quo comes at the cost of not aiming for productivity (the rate at which a country produces goods or services), which typically emerges from innovation and creativity. Such states suffer from fiscal inflexibility as their aid-buffered budgets become insufficient to please the rentier populace.
Yet the Jordanian government cannot sit idly by as economic growth worsens; a 22 percent unemployment rate warrants a countercyclical (not procyclical) fiscal policy. Without the active role of the state, not only will the economy stagnate further, it will not develop. Contrary to the views espoused by the World Bank and the IMF, a strong proactive role of the state that is based on a selective industrial policy is required, especially given the current boycott wave (which grants room for domestic industry to compensate for foreign goods). Leaving the economy at the whim and mercy of external factors weakens the economic potential of the nation and dissipates any growth potential. And asking for a procyclical fiscal policy is the wrong prescription, especially in 2024.
Published in Jordan News:
https://www.jordannews.jo/Section-36/Opinion/Fiscal-Policy-in-2024-33789
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