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

Is government debt bad? 16/05/2022

Government debt in Jordan has surpassed the GDP, the income of the nation, to reach 114 percent, and that has become a source of worry for many. It has caused a slew of negative rumors and nasty scenarios, especially by non-specialist “pundits”.

Many of those concerned view the debt as if it were that of an individual, which is not the case. They also think of debt as a negative phenomenon, which is also not always true.

Currently, there is much misunderstanding surrounding the government debt. Government debt rises when the government runs a deficit and falls when its budget turns a surplus. More often than not, the government ran a deficit, and so the debt grew.

Some analysts view government borrowing as equivalent to raising taxes, under certain assumptions, and if looked at it from an intergenerational perspective. Such a view, known as the Ricardian Equivalence Theorem, was ably expounded by the neoclassical economist and Nobel Laureate Robert Barro. The theorem holds that today's deficit that is financed by debt will have to be repaid with interest by future taxes, hence the thesis that tax and debt are equivalent.

In spite of the immediate appeal and apparent simplicity of the theorem, it is not entirely true and may be misleading, as it views government debt as if it were the debt of a private citizen.

Government debt is different from that of an individual. In Jordan, 60 percent of the government debt is held by domestic banks and the Social Security Invest Fund (SSIF). Depositors at banks do not view the debt as a burden, as it provides them with an extremely safe source of revenue. Furthermore, SSIF sees holding government bonds a highly safe and lucrative source of revenue — even higher than some of its other investments.

Also, government debt, unlike private debt, does not have to be repaid, as the old debt is rolled over (replaced by new debt), a decade-long practice in Jordan. Typically, the government replaces the old debt with a new (sometimes cheaper) debt, with possibly longer repayment periods. 

It is important, however, to note that the size of debt does not grow at a quicker rate than that of the growth of the GDP. Hence, it is vital for the health of an economy that the debt be focused on creating economic growth.

In other words, one should not believe that the government debt is not a source of worry. Rising interest payments on the growing debt limits the government ability to dedicate resources to growing the economy, as more and more government resources go to repaying the debt. In addition, if a portion of the debt is foreign, the interest payments will go to foreigners and not be spent on the development of the domestic economy. Consequently, borrowing should be aimed at financing projects, R&D, and the human capital of a nation, and other productivity-enhancing measures, not the bad habits of government, such as overstaffing.

If the government’s future revenues do not grow, it will have to raise taxes, a recourse that will dampen growth and increase inequality, as the wealthy collect revenues on the government debt and the poor suffer in a jobless, stagnant economy.

One needs to view debt with all its pluses and minuses. It is also important that the government in Jordan abide by the golden rule, which states that the government should only borrow to finance projects that enhance the productivity of the nation.  It takes time to reach there, but Jordan must, and should, start doing so.

https://www.jordannews.jo/Section-36/Opinion/Is-government-debt-bad-16744

About the current economic recovery 23/05/2022

Recent data shows that an economic recovery is underway in Jordan. The GDP is expected to grow in 2022 at 2.4 percent in real terms, which is a slight improvement over the level of growth in 2021. The recovery, albeit slow, is a recovery and not a regress or a decline in economic activity and can be a cause of optimism, even if cautious optimism, thus replacing whatever negativity persists.

In terms of fiscal policy and public debt, tax revenues increased by JD54.8 million to reach JD970.2 million in the first two months of 2022, and Jordan’s debt fell by JD244 million from its level in 2021. If the trend continues, the debt to GDP ratio can be expected to fall significantly this year, which would free the budget to expand the capital expenditure and increase investment in the country’s infrastructure, education, and health.

Remittances from Jordanians working in GCC countries have increased by 1 percent and may be expected to increase further as the Gulf economies continue to gain due to the upsurge in oil prices. The GCC economies are forecast to grow by 6.4 percent this year. The impact will undoubtedly be felt in Jordan in the form of aid and remittances from these countries. 

Inflation is expected to be around 2.8 percent this year, which is much lower than that felt worldwide. The effect of the Russian-Ukrainian war on Jordan may be diluted somewhat regarding the cost of wheat and energy. The government has already purchased the equivalent of a 13-month supply of wheat, and oil has been bought through long-term contracts which will safeguard the economy from further upward fluctuations, should they occur.

Foreign reserves are at an all-time high.  The current level of reserves is around $18 billion, which will cover 9.5 months of imports. This means that in the implausible case Jordan does not receive any foreign currency from exports, tourism, aid, and remittances, the Central Bank of Jordan has enough reserves to cover over nine months of imports. Note that the suggested level of foreign currency reserves is a two-month worth of imports.

Additionally, tourism was up 253 percent in the first four months of this year relative to the same period last year. Investment in the first quarter of 2022 rose by 107 percent relative to the same period last year, and foreign direct investment has increased over seven-fold from last year.

Overall, the numbers show an improvement at all levels of the economy, which, as stated earlier, calls for optimism. Hopefully this optimistic will translate into a bigger growth rate and further thrust the economy toward recovery.

https://www.jordannews.jo/Section-36/Opinion/About-the-current-economic-recovery-17062

About the current sources of growth and inflation 31/05/2022

Economic growth is somewhat accelerating and so is inflation as measured by the Consumer Price Index (CPI). It is important to know where the growth in the GDP and prices came from. 

According to the Jordan Department of Statistics, the GDP grew by 2.6 percent at constant prices in the fourth quarter of 2021 compared with the same period of 2020. Also, the Consumer Price Index for April 2022 increased by 3.59 to reach 105.99 against 102.31 for the same month of 2021. 

The growth in the GDP (2.6 percent) was caused by growth in the Construction Sector (6.1 percent), followed by the growth in the Mining and Quarrying Sector (5.6 percent). Note that for the year 2022, the Mining and Quarrying Sector will grow substantially due to the disruptions and delays in the global supply chains, increased demand for fertilizer (Jordan is the main exporter of phosphate and potash), and the Russia-Ukraine War, which interrupted the supplies of phosphate and potash and other commodities from these two main producers. 

Another sector which grew at above the overall rate was the Wholesale, Retail Trade, Restaurants and Hotels Sector, which grew at 3.5 percent, and is also expected to grow even further as all restrictions related to COVID are removed and supply meets the rise in demand. Note that the demand will not ebb this year as evidenced from the current tourism data. 

Hence, short of a policy induced supply shock, the economy should grow, not at 2.6 percent but more and above the IMF predicted growth rate, which would be also good news for the budget whereby a reduced budget deficit becomes possible as inflation increased further government revenues.

According to another report by Dos, there is also an increase of 3.59 percent in the Consumer Price Index for April 2022 to reach 105.99 from 102.31 for the same month in 2021. The rise in prices was mainly due to increases in the prices of Fuels and Lighting (1.28 percentage points), Transportation (0.73 percentage points), Vegetables and Legumes Dry and canned (0.43 percentage points), Meat and Poultry (0.19 percentage points), and Oils and Fats (0.16 percentage points). 

On a month-by-month basis (April relative to March), the Consumer Price Index reached 105.99 for April 2022 against 104.7 in March 2022, sustaining thus an increase of 1.20 percent. The main contributor to the increase was a 1.13 percentage point increase in the price of Fuels and Lighting, followed in second place by Meat and Poultry (0.16 percentage points). 

Therefore, according to official data, the majority of the current inflation has been caused by the increase in the price of Fuels and Electricity, an expenditure item that is controlled in terms of quantity and price by the government. This item also enters into the cost of production and consumption of all things and their prices. Consequently, if a policymaker wishes to truly combat inflation, the tools are readily available.

Based on the above, policymakers should focus on growth, even at the cost of truly subsidizing energy to industry. The manufacturing sector, which only contributes 17.8 percent of the GDP and has been contributing this percentage for over five decades, needs to grow. For a achieving the required, smart and sustainable growth rates, innovation must emerge from a solid and equitable partnership between the public and private sector.

Published in Jordan News

https://www.jordannews.jo/Section-36/Opinion/About-the-current-sources-of-growth-and-inflation-17366

The public transport impasse 13/06/2022

The import of vehicles in Jordan is a burden on citizens and the balance of payments. One would therefore think that improving the public transport system should be a government priority. So, why does Jordan not improve the public transportation system? The answer is not as straightforward as one would expect.

A new World Bank report,  “Jordan Public Transport Diagnostic and Recommendations”, that was released on June 6, 2022, called for, among other things, an efficient, cost-effective, and reliable public transport system in the Kingdom. It is estimated that the current transportation system cost the country about $3 billion loss per year. The figure neither accounts for the loss of productivity (around $65 million per year) as a result of the low participation of women in the economy nor does it account for the greenhouse gas emissions ($500–1000 million per year).

Before addressing the question it is good to recall that in 1911 Jordan had a railway network for passengers and goods and it ran on Jordanian oil (shale oil). Now, 111 years later, Jordan still does not have a national railway network that connects its cities and populace. Furthermore, the recently suggested railway projects are either too minuscule in scale relative to the network of the past or too limited in scope.

An often-cited reason that there has not been a serious attempt to address the public transport system is that the budget suffers from fiscal inflexibility, which means that there is no room in the budget for capital expenditures on major projects such as public transportation system, including a national railway network. However, the issue of funding could be addressed by a public-private partnership project as was the case in building the new Queen Alia International Airport, and the projects suggested within the Saudi Jordanian Investment Fund that has been recently reactivated. Also, armed with this World Bank report and a plethora of other works and research, the government could approach donors to help, through grants or soft loans, finance such an endeavor. But this has not happened yet.

Could it be that the government could not afford to lose a major portion of its revenues due to the fact that people import vehicles in order to meet the deficit created by a lack of a proper public transport system? Let us review the figures: the government makes JD1145 million annually in taxes on imports, which include vehicles — a major source of revenue. It also makes JD355 million per year in customs and fines of which a sizable portion comes from the import of vehicles.  Also, once inside the country, vehicles generate several annual streams of revenue, such as JD110 million from vehicle licenses, JD61 million from vehicle registration, and JD20 million from issuing and renewing driver licenses issue. A public transport system would significantly reduce these income streams; thus further increasing the deficit of a budget which already suffers from an endemically growing budget deficit.

In other words, there is a case of an obvious conflict of interest between that which is good for the country, and what is beneficial to the government. Solving one dilemma would create another.

However, this would be an erroneous type of thinking. It is myopic and extremely lacking in vision and wisdom because the improvements in the economy would more than compensate the government in the medium and long term for the immediate shortfalls in revenue through enhanced productivity and economic activity. The improvement in the overall economy and balance of payments would more than compensate for the cost of overhauling and modernizing the transport system, which is why countries all over the world vie to continuously improve their systems.  All that is needed is to believe, an act. Yes, act as if with a mission, with the mission being: Modernize the economy!

Published in Jordan News:

https://www.jordannews.jo/Section-36/Opinion/The-public-transport-impasse-17987

For whom the road tolls 20/06/2022

I just had to borrow the title of Ernst Hemingway’s book "For Whom the Bell Tolls" for this article, especially knowing that the main character in the novel (set during the Spanish Civil War) is named Robert Jordan and that the debate in Jordan is about tolls and roads. All similarities stop here, of course.

Jordan launched the Economic Modernization Vision on June 6, 2022, a blueprint for economic accomplishments (366 initiatives presented within the vision, covering 35 key sectors and subsectors) over the next 10 years. One initiative, related to infrastructure, states that the aim is to improve the transport infrastructure and related services, develop a strategic plan for public transport throughout Jordan, and raise the efficiency of road management.

In response, the government announced last week that it will begin examining the details of the priorities and initiatives of the Economic Modernization Vision, on June 18, 2022. Meanwhile, the government was also busy making announcements, alas, all negative in content, regarding energy, food, and water, thus cloaking the outlook in a shroud of darkness and misery.

A quick scan of the vision shows that it mentions “traffic tolls” only once.  However, the media reported that the World Bank is studying the financial underpinnings of a project to improve Jordan’s road and highway management. Simultaneously, talk began of imposing tolls on roads and highways. The conversation, which is one-sided, of course (from the government to the public at large), already specified the size of the tariffs for use on the toll roads (JD0.11 per kilometer on small vehicles and JD0.22 per kilometer on trucks). This is highly unusual.

The whole discourse is odd, to say the least. What about all the projects in the vision? Why pick the one that requires the imposition of a fee, instead of the ones that provide enhancements and opportunities for development?

Tolls are usually used by countries to finance new roads that save time and money for commuters, they are not levied for existing roads. They are alternative, more efficient means, and their use is optional. If these roads are built by investors in one form or another of a public-private partnership (PPP) project, the government (central or local) enters into negotiations with the investor to determine the tolls to compensate the investor for the cost of building the road. The toll itself does not need to persist after the investor is fully compensated (cost plus profit) because it is a vehicle for facilitating investment and not a new source of revenue for the government.

Moreover, a typical PPP project requires a minimum of one year of preparations, negotiations, and tendering. It has to go through government approvals relating to: selection as a PPP project; making a proper feasibility study, with a somewhat detailed technical design; deciding the bidding mode: bidder invitation documents, selection of bid winners, and final approval(s).

Meanwhile, the Ministry of Finance has to commit to allocating the necessary resources over several years. Transparent and multi-year commitments and assurances to investors have to be provided by the government. In other words, a PPP project entails many steps and involves many entities, and one of its outcomes is the determination of a toll. As such, deciding the toll before starting such an arduous and lengthy process is, to say the least, unusual.

In addition, one wonders if the World Bank study took into consideration the many nuances that relate to the transport sector in Jordan. Jordan levies all types of taxes and fees on vehicles, which amount to 80–140 percent of the original value of the car. Furthermore, taxes on fuel are levied purportedly for all types of purposes (environment, road maintenance, for example). Since the Constitution does not allow the fees or taxes to go to a specific purpose, even though they are charged for that purpose, the imposed fees go into the Treasury to be spent on all avenues, including, possibly, the maintenance of the road network.

Another observation begs to emerge. It is common sense that no modernization plan that promises a better future should start with a toll, fee, tax, price hike, or any additional burden upon the population of a country. A wise policymaker would seek the support of the populace first, which is best generated through the introduction of some quick benefits and gains (low-hanging fruits), not burdens and tolls, especially in a country where per capita income and wealth have been deteriorating over the past 12 years.

Let us hope we will not hear the road till toll.

Published in Jordan News:

https://www.jordannews.jo/Section-36/Opinion/For-whom-the-road-tolls-18303

A casino should come last on Jordan’s development agenda 17/07/2022

A debate emerged in 2007, and again more recently, in 2019, on whether Jordan should have a casino. The main argument of those in favor is that a casino would boost tourism revenues. Those against citing moral issues and social problems, such as addiction to gambling and its consequences.

To start, here are some statistics: there are 9,284 casinos in the world, 2,116 of which are in the US and 3,785 in Europe. Some Arab countries, such as Egypt, Morocco, Tunisia, Algeria, Lebanon, and Iraq, have casinos as well. In terms of the number of casinos per city, Las Vegas and Macau lead the world. The global gambling market was $287.43 billion in 2021. It is expected to grow to $458.93 billion in 2022.

Many of the Arab countries that have casinos allow them to be used only by people with foreign passports (tourists and visitors). Had Jordan allowed the establishment of a casino, it would be done the same.

The wisdom of this prescript is to generate more funds from tourists. But do casinos increase tourism revenue? The answer is not straightforward. Some of the income realized by casinos from tourists could be simply a substitution of part of one expenditure venue for another. In other words, instead of tourists spending money on some item, they engage in gambling activity. Consequently, there would be no increased spending by tourists.

But, what if a tourist were to come to Jordan specifically for gambling? The impact would, of course, be an increase in tourism revenues.

Many Jordanians carry other passports and would thus be able to access casinos. Some would say if they are going to gamble their money away, they should be allowed to gamble at home.

Casinos do not create value. Hence, money spent at a casino is a transfer of money for nothing. It does not lead to increasing the real GDP. However, if the money is gambled outside the country by Jordanians, it would be leaked out of the economy, and thus, it is better to spend it at home. 

On the other hand, since the money is spent on a non-value-creating activity, it is diverting spending from activities that create real value, which cannot be good for the development of a country. In fact, this type of spending would be harmful.

Some also say that casinos make only $1 out of $30 gambled there, and a rational player would know when to stop. Actually, cheating can be rampant at casinos, and many casinos serve alcohol (mostly free of charge) to numb rationality and encourage recklessness. Some casinos make it difficult to know where the exit is so that one would stay longer. Others, like many of the Las Vegas casinos, keep it dark inside so that one would not know day from night.

Many also claim that casinos invite criminal organizations and activities. Some casinos are controlled by organized crime. In fact, in some cases, bringing the gambling industry such as casinos into a country means inviting with it all types of criminal behavior: prostitution, money laundering (casinos are considered a great setting for this criminal activity), and tax evasion (it is difficult to tax a gambling business and countries have come up with very creative procedures to tax them). After all, the legendary Jewish-American mobster Benjamin “Bugsy” Siegel was credited for developing the Las Vegas Strip.

Those in favor argue that casinos help create clusters of supporting and complementary activities, such as hotels, restaurants, shows, theatres, etc. This is true; however, before one completely buys into this argument, a legitimate question would be: could these activities not have emerged without the casinos? The answer is of course yes. Other initiatives could have done so. Any of Jordan’s tourist sites could have generated clusters of activities around them that maximize the return to Jordan from the tourism activity there.

Some believe that having casinos is the fastest way to stimulate tourism in a country. This would not apply to Jordan for two reasons: gambling encourages sin tourism, which is most likely not the type of tourism that Jordanians hope to attract; and the tourism market in Jordan is mature, hence all that is needed is to encourage value-adding activities.

Another argument for having casinos is that they would create jobs. This is a weak argument. Most staff for a casino would be sourced from outside their localities since the casinos require skilled and highly skilled workers. The jobs that contribute to the local economy are low-skill, and they would not be many. Moreover, low-skill jobs fail to spur competitiveness or development.

A new argument that emerged for having casinos is that online gambling is rampant and growing, and can be accessed from virtually anywhere, and simply through one’s mobile phone.  According to world statistics, around 26 percent of the world population gamble, which means that approximately 1.6 billion people worldwide gamble, and 4.2 billion gamble at least once a year. So, having casinos enables regulating gambling and keeps some of the casino winnings inside the country.

On the other hand, based on empirical evidence, some believe that by making the gambling activity legal, gambling, as a social problem, would expand and its negative consequences would be exacerbated.

The point that is hardly ever brought into the debate is probably the most important. It relates to Jordan’s current stage of development. Being a less developed economy, Jordan should focus its efforts on value-creating activities. Moreover, it should enhance product complexity, know-how, competitiveness, and smart economic growth. Casinos do not enhance development — this is well established; thus, having a casino should come last on Jordan’s development agenda.

Published in Jordan News:

https://www.jordannews.jo/Section-36/Opinion/A-casino-should-come-last-on-Jordan-s-development-agenda-18608

Incentives and investment 18/07/2022

Over the past three decades, countries have been increasingly liberalizing their outlook toward foreign direct investment (FDI), arguably to raise employment, exports, or tax revenues, or knowledge-intensive production (through either direct or spill-over contributions to host countries’ private sector). Jordan is no exception. It is currently in the discussion phase of a new draft investment law.

Many factors may contribute to attracting FDI into a country. The most important ones are usually the market size, the real income levels, and the potential for growth. Other factors are the level of skills in the host economy, the availability of infrastructure, clusters, and other structures that facilitate the efficient specialization of production, trade policies, and political and macroeconomic stability.

Depending on the product and investment structure or type, some factors may acquire more importance than others. In the Middle East and North Africa, one major deterrent to FDI inflows has been the unilateral decision-making process — decisions that are made in a non-institutional manner and that tend to depend on the whims and taste of an individual rather than on well-established and observed policies, institutions, and procedures.

Jordan falls short in the market size and economic growth categories. Skill levels and infrastructure are about average, as the country has been exporting its best talent to the Gulf countries for decades, and its infrastructure still lacks a modernized public transport system. As for energy and internet costs, they are considered high.

In terms of macroeconomic and political stability, Jordan has not had an economic crisis since 1989 and has not had an internal or external conflict for over half a century. Therefore, it is a regional winner in this respect. However, it does tend to change its economic laws frequently. For example, it has introduced a new investment law every 4.4 years over the past 70 years. Therefore, in order to be competitive in terms of investment attractiveness, Jordan must provide well-studied and analyzed incentives.

However, no discussion about incentives is straightforward and should be multidimensional as, among other things, incentives come in a variety of forms. They could be fiscal incentives, such as lower taxes, financial incentives, such as grants and preferential loans, and incentives like market preferences, monopoly rights, land grants, etc. The types of incentives depend on the strategic goals of the host country, which may be enhancing innovation and creativity, enhancing competitiveness, and achieving sustainable development.

The dominant view around the world is that the most successful incentives are those which reduce investment risks and lower the cost of production.

Small, low-growth economies may need to provide many more incentives than large ones to attract FDI. Empirical evidence suggests that incentives play a positive, albeit limited, role in attracting FDI. Market characteristics, relative production costs, and resource availability tend to better explain the existing cross-country variations in FDI inflows. Furthermore, to further complicate the role of incentives, a foreign investment that does not differ from a local one can hardly justify the provision of an incentive. Having said this, the situation may still warrant providing incentives if the unemployment rate is high in the host country and the policymakers wish to lower it (as in the case of Jordan).

The current draft of the investment promotion law contains many inconsistencies and flaws. For example, the term “large investor”, in the draft, is flawed in many ways. First, the reference should have been to “investment”, not “investor”, because even though the investor may be a billionaire, his/her investment in Jordan could be small. Second, it is not only the size of the investment that matters, but also its contribution to boosting knowledge and creating complex products, or to employment, geographical incidence (poor underdeveloped rural area versus an urban center), or a mix of all three.

It is incomprehensible that an investment governance framework would provide the same incentive(s) to a garment factory as it would to a semiconductor research or production facility. 

There is much more to be said about the current draft law. Let us hope that the coming days may usher in a learned, in-depth, well-researched, and benchmarked analysis and debate.

Published in Jordan News:

https://www.jordannews.jo/Section-36/Opinion/Incentives-and-investment-19357