The interplay between politics and economics has been starkly apparent in
Jordan over the past decade as economic realities have forced major
political transformations, most notably toward greater democratization, and
as political events such as the Palestinian Intifadha, the Gulf War, and the
peace process have all had important repercussions on economic activity in
the country. Jordan is a small country in a very strategic region. As
such, politics has often overshadowed the underlying structure of its
economy and the monarchy has been able to use economic rents, often
politically-inspired, to mask economic problems and delay needed economic
reform. The recession that Jordan has recently entered into, however,
signals that with the increasing globalization of capital, Jordan is finding
it more difficult to avoid the problems caused by an economic system that
cannot generate adequate capital on its own. Jordan’s problematic financial
sector is thus likely to become an increasingly important variable in
explaining the future political development of the country.
From the founding of the Hashemite Monarchy in Jordan in 1921 until the
mid-1980’s, the country was the recipient of large rents, initially in the
form of external aid which was later supplemented by large remittances.
Between 1973 and 1980, foreign assistance accounted for almost 55% of
government revenue. In 1980 alone, Jordan received grants of $1.13 billion
while its current revenue was equivalent to only $711 million. Meanwhile
the money that entered the country from Jordanians working abroad, mostly in
the petroleum-exporting countries, exceeded $1 billion in 1984, a year in
which total GDP was only $4.9 billion.
Because so many resources were coming from external sources, Jordan was able
to finance chronic trade and budget deficits (in 1980 Jordan’s trade deficit
was over $1.5 billion and its budget deficit was over $300 million ) as well
as provide generous governmental services without having to extract
resources from its own citizenry. Taxation during this period typically
financed only 10 to 20% of state expenditures and import duties another 20
to 30% while the state was able to distribute benefits to tribal leaders,
subsidies to agricultural capitalists (mostly of East Bank origin) and
business entrepreneurs (predominantly Palestinian), while at the same time
maintain extensive health and education programs for the citizenry at large,
subsidize many of their basic consumer goods and provide state employment
for nearly half of the labor force (three-quarters of East Bankers worked
for the state) without having to incur crippling debts or maintaining a
productive economy. In 1984 only 4.9% of the Jordan’s GDP came from
agriculture and only 11.9% came from manufacturing.
While throughout its history until the mid-1980s, such rents enabled Jordan
to live beyond its means, the economy remained highly vulnerable to the
external political and economic environment. When changes began taking
places in that environment, Jordan suffered. The dramatic fall in oil
prices in the mid-1980s led to a sharp decline in the aid provided to Jordan
from the petroleum-exporting states while it also led to the return of
growing numbers of expatriate workers. From the high of $1.13 billion in
grants in 1980, Jordan received only $216 million in 1989. Meanwhile,
remittances that accounted for more than a billion dollars in 1984 had
dropped to $560 million by 1989 while at the same time current state
expenditures increased from JD305 million in 1980 to JD713 million in 1989
leading to a growing deficit and a total external debt that had increased
from $2 billion in 1980 to $7.2 billion by 1989, making debt almost twice
the value of total GDP which was $4.1 billion that year. The interest
payments on the growing debt cost the Jordanian economy $407 million in 1988
putting the country further in the red.
Meanwhile the Intifadha that had broken out in Dec. 1987 in the occupied
Palestinian territories exacerbated tensions between King Hussein of Jordan
and the PLO. In July of 1988, Hussein proclaimed Jordan’s total legal and
administrative disengagement from the West Bank as a response to the
Intifadha. This led to considerable anxiety among East Bank Palestinians
regarding their status as citizens in Jordan. Many Palestinian individuals
as well as organizations subsequently withdrew their assets from Jordanian
banks intensifying the financial crisis that resulted in a decline of more
than 35% in the value of the Jordanian dinar. The dinar fell even further
in January 1989 when for the first time in its history Jordan failed to meet
its scheduled debt payment. By 1992, the dinar was worth only half of its
1987 value.
Prior to the 1980s, the existence of huge rents enabled the monarchy in
Jordan to buy political legitimacy through the distribution of economic
benefits without the need for political liberalization. Even throughout
most of the 1980s the state attempted to maintain such a system by financing
growing budget deficits through domestic borrowing, development loans, or
syndicated borrowing on the Euromoney market - thus leading to the huge
increase in external debt. The need to reschedule those debts in early
1989 required Jordan to agree with the IMF on a five-year economic
stabilization program that aimed at solving some of the chronic structural
problems that outside financial support had previously enabled the regime to
ignore. Among other austerity measures, the program entailed sharp
reductions in state expenditures including the cutting of subsidies on a
number of basic goods which led to sharp price increases for bread, rice,
milk and fuel. As a response, massive demonstrations broke out throughout
the country in April 1989. For the first time in Jordan’s history, riots
had economic rather than political roots and, even more importantly, were
led and almost exclusively undertaken by the East Bank Jordanian Bedouin
tribal and agricultural communities as it was this community that was most
detrimentally affected by the inability of the regime to maintain its
extensive patronage network.
The monarchy has always depended on the strong support of the East Bank
Jordanians as against the Palestinian refugees and their descendants who
constitute a majority of the country’s overall population but have
historically had tense relations with the king. Discontent within the
tribal communities was seen as a direct threat to the viability of the
monarchy that could not be suppressed through coercive measures. The king
thus either had to halt the austerity program (a financial impossibility) or
seek legitimacy from a broader stratum of the population in ways other than
he had in the past. The king opted for a program of political
liberalization that he hoped would make the extraction of financial
resources from the citizenry more legitimate. Within six months the country
had its first parliamentary elections in more than three decades and by far
the freest and fairest ever held in the kingdom. Subsequently martial law,
which had also been imposed for two decades, was frozen, political parties
were allowed to form, and the media was given more freedom than it had
enjoyed in the past. Jordanians increasingly felt that the government was
accountable and the regime was able to continue with economic austerity
measures without incurring the same resistance.
While financial and economic problems can explain the political decision to
democratize, two political events in subsequent years had a tremendous
impact on the economy. Less than a year after Jordan’s parliamentary
elections, Iraq invaded Kuwait beginning a series of events that culminated
in an American-led war on Iraq. The Gulf crisis had a profound economic
effect on Jordan. Jordan lost its main export markets in Iraq, Kuwait, and
Saudi Arabia, while tourism and transit trade dwindled. Even more
significantly, due to the political liberalization that had recently taken
place, King Hussein had no choice but to go along with the overwhelming
sentiment within the country and oppose American intervention in the war.
As a result, the petroleum-exporting states halted what was left of the aid
that they had been giving to the country and sent back over 300,000
Jordanian expatriate workers, cutting the already reduced remittances Jordan
had been getting from workers in the region nearly by half. Net current
transfers dropped from $562 million in 1989 to $313 million in 1990 and $386
million in 1991. The immediate financial cost of the war for Jordan was
approximately $1.2 billion, and the longer-term effects seemed even more
serious as Jordan appeared unlikely to regain the favor of the gulf states
which had previously played such a large role in providing it with the rents
that enabled it to maintain its warped economic structure while the hundreds
of thousands of people expelled from Kuwait and Saudi Arabia put strains on
Jordan’s already overburdened labor market in which more than a quarter of
the population was unemployed in 1990.
The second political event was King Hussein’s decision to embrace the peace
process and go so far as to sign a peace treaty with Israel in 1994. Facing
bleak financial and economic prospects in the aftermath of the Gulf War,
King Hussein felt that a new strategy was needed to tackle Jordan’s
problems. He hoped that the normalization of ties with Israel would provide
a huge "peace dividend" in the form of increased US aid, a resurgence of
tourism and investment as well as in increased trade and economic
cooperation directly with Israel and, even more importantly, with the West
Bank—an area that had constituted a vital part of Jordan’s economy prior to
its occupation in 1967. Embracing the peace process against popular
discontent with its provisions, however, required King Hussein to curb some
of the democratic freedoms that he had just instituted. To thwart
opposition to the normalization of ties with Israel, King Hussein decreed
stifling new press laws, changed the electoral system to favor tribal
elements and curtail the power of large parties, and reinstituted former
practices of harassing and jailing opposition elements. These measures led
all the major opposition parties to boycott the 1997 parliamentary elections
and the democratization process that had begun as a response to an economic
crisis less than a decade ago quickly stalled as the king pursued a
different political path that he hoped would lead to economic recovery.
The US did forgive $700 million of Jordanian debt as a direct result of the
1994 peace treaty with Israel and did resume aid payments to the country as
did some other European countries, though such aid was modest and did not
even come close to approaching the amount of aid the country had been
receiving in the late 1970s and early 1980s from the petroleum-exporting
states. The year before signing the peace treaty, Jordan received $73
million in grants and an additional $130 million in technical cooperation
grants. Those figures increased to $306 million and $132 million
respectively in 1994, largely as a result of the peace treaty, but then
decreased to $219 million and $162 million in 1995 a far shot from the $1.13
billion and $25 million of 1980. On the other hand, trade with Israel and
the West Bank, what many in Jordan had hoped would be one of the main
benefits of peace, never materialized. Jordanian industry is tailor-made to
meet many of the Palestinians’ needs for medium technology goods and
textiles as well as construction material like cement, iron bars, and
ceramic tiles but as such it posed a threat to Israel’s total control over
the captive $2 billion Palestinian market and Israel imposed draconian
measures that made it practically impossible for Jordanian traders to
infiltrate the occupied territories. Jordan quickly realized that the
potential for increased trade, tourism, and private investment that could
come from the peace process would not be realized in an era of increased
economic globalization without continuing the painful process of
restructuring its economy and reforming its financial system. While the
peace process may have allowed Jordan to buy some time, it could not solve
all of Jordan’s problems.
Jordan has been restructuring its economy with the help of the IMF since the
1989 crisis and has been successful in a number of areas. Inflation was
brought down below the IMF’s target of 7% to 3.5% and the central bank has
now built up enough foreign-currency reserves to cover five months of
imports while food subsidies have been abolished, even in the face of
violent riots. Despite these successes, the economy has been growing more
slowly than the population in recent years. In 1996, growth was only .8%
and in 1997 it was 2.7%. With a continued decline in consumption caused by
the austerity measures, a slow-down in real estate investment that had
dramatically increased after the Gulf War when expatriates returned to the
country, stagnant Iraqi and Palestinian markets, as well as the lack of any
peace dividend, Jordan may even experience negative growth in 1998. To
avoid a recession and reverse a situation of falling average living
standards, Jordan’s economy will need to grow much more rapidly. That growth
will depend less on its ability to attract the kinds of rents that it did in
a previous era than it will on its ability to increase domestic savings and
attract private sector investment from both internal and external sources.
In this era of economic globalization, attracting such investment and even
increasing domestic savings will depend a great deal on Jordan’s financial
system thus making financial sector liberalization one of the most important
determinants of Jordan’s future economic prospects.
Commercial banks are the principal allocators of finance capital in Jordan
while the stock market, even though it enjoyed phenomenal growth in 1992 and
1993, has been in a prolonged slump. There are a total of 17 local
commercial and investment banks in Jordan, but the sector remains highly
concentrated and its two largest commercial banks, Arab Bank and the Housing
Bank, command about 50% of the total deposits. In 1997, the Higher Court
of Investment removed the 50% foreign ownership restriction on the banks and
some other listed stocks. More than 50% of both major banks are now owned by
foreigners, mostly governments and government agencies of Saudi Arabia,
Kuwait, Qatar and Oman. Private Jordanian investors, many of whom are very
close to palace circles, also have substantial holdings in the banks but the
Jordanian banks are not linked to industrial conglomerates or holding
companies as major commercial banks are in many other financial systems that
are based on concentrated oligopolistic commercial banking structures.
While both major banks, especially the Arab Bank which has one of the best
reputations in the region, seem financially healthy, the foreign ownership
of the banks as well as the lack of stronger economic linkages between the
banks and major industrial enterprises weakens the structural power of
capital in Jordan.
The Central Bank plays an important role in Jordan though it does not seem
to enjoy a large degree of autonomy vis-a-vis the government. To maintain
the strength of the Jordanian dinar, to encourage JD over foreign
denominated deposits, to prevent capital flight and even encourage the
repatriation of some of the estimated $5-6 billion in Jordanian capital held
abroad, the Central Bank has maintained tight monetary policies with high
interest rates throughout the 1990s bringing a lot of money into the banking
sector but squeezing banking profits. With so many banks in a relatively
small country, there is fierce competition for new liquidity—reflected in
the fact that lending rates are only two or three percentage points higher
than deposit rates of about 9 percent. Stung by the failure of Petra Bank
in 1987 and the more general banking crisis of 1989, the Central Bank has
been encouraging mergers among the smaller Jordanian banks throughout the
1990s, though with limited success. While some banks have merged, new ones
have also been established. New banking laws passed in 1998 further
strengthened incentives for mergers while also increasing overall
transparency in the sector. The laws largely were in reaction to the
failure of the Amman Bank for Investments, the first failure since the fall
of Petra, but were also intended to strengthen the banking sector and
provide it with the means to capitalize on new trade and investment
opportunities that would likely materialize if the regional peace process
picked up ground or the sanctions on Iraq were eased.
While a strong banking sector can help Jordan avoid capital flight and
perhaps even bring in some of the capital that has already left the country,
increased foreign investments will depend more on stock markets than
banking. The Jordanian stock market witnessed a boom from 1991 to 1993
during which the all-share index climbed 100 per cent in three years,
turnover tripled from JD302 million in 1991 to JD969 million in 1993, and
market capitalization rose above $5 billion. While the boom gained the
attention of foreign investors, it was not led by them and in fact
bureaucratic obstacles limited the amount that could have been brought in by
external sources. The boom was largely the result of the temporary infusion
of cash that came into Jordan with the more than 300,000 expatriate workers
that were expelled from the Gulf after Iraq’s invasion of Kuwait and brought
an estimated $1.5 billion in foreign currency with them to Jordan.
The rapid growth of the stock market led to some anxiety, however, and in
July 1993 the Central Bank intervened with measures to deter local
speculators from buying stocks with borrowed funds. As a result, annual
turnover dropped by 40% while price/earnings ratios declined from 25 times
to a more modest but still attractive 16.5 times income. Since then the
market has been in a prolonged slump and any revival now seems dependent on
foreign investment, which has long been impeded by bureaucratic and
political obstruction. Recent reforms to attract such investment have
probably come too late to enable Jordan to compete with other regional
markets and develop the kind of financial and service economy that seemed
possible earlier in the decade when Lebanon’s stock market was still closed.
Until 1995, foreign investors in Jordan were required to get government
approval and between 1993 and 1995 when 56 foreign funds applied to invest
$450 million in the stock market, the government only approved $200 million
after lengthy delays that irritated investors. The stock market has also
been weakened by the tight monetary policies that provide incentives for
local investors to put their money in fixed interest securities.
A number of reforms in 1997 have the potential of increasing interest in the
stock market. In addition to scrapping the 50% foreign ownership
restrictions on banking and insurance stocks, the Central Bank cut interest
rates for the first time in eight years and lifted foreign currency controls
that had been imposed since 1989. The Jordan Securities Commission was
also established and soon issued wide ranging financial disclosure rules
that will assure greater transparency. Such reforms have led to increased
interest in the stock market. Total trading for 1997 reached JD355 million
which represented a 43% increase over 1996 even if it was still far below
the 1993 high. Foreign investment in the market in the first four months
of 1998 was four times what it had been during the same time period in 1997,
but it was still low at only $28.5 million. The government has also begun
taking more serious steps toward privatization in ways that could attract
foreign investment. In 1998 serious steps were taken toward the sale of
Royal Jordanian, the national airline, and the Jordan Telecommunications
Company.
The 1997 banking and stock market reforms were a direct result of the
increasingly dire state of the Jordanian economy. Unlike private
capitalists in many other parts of the world, Jordan’s largest businesses
have never been in the forefront of calls for financial reform. Big
business interests in Jordan all have close ties to the palace and have
never called for increased transparency in ways that would expose the level
of patronage that exists. Without such transparency, however, Jordan is
unlikely to attract the kind of foreign investment that is needed to
maintain manageable debt and unemployment levels. Politically, the monarchy
is stuck between choosing to deepen political liberties and thus increase
its legitimacy or choosing to continue its strong support for an unpopular
peace process that while it may not provide immediate economic dividends
does keep Jordan closely tied to the US. Unfortunately for the stability of
the country, this choice is being made during a regime transition as Crown
Prince Hassan succeeds a terminally ill Hussein who has been in a hospital
in Minnesota and has not been seen publicly since mid-July. King Hussein,
the longest ruling head of state in the world, has led Jordan for more than
45 years and it is still unclear whether Hassan can command the same level
of loyalty in the country. Whatever political choice is made, Jordan will
have to liberalize its financial sector. The choice, which is solely in the
hands of the monarchy, then largely breaks down to what is seen as less
risky for the monarchy: democratization with concomitant regional and
international isolation, or close ties to the US with decreased internal
legitimacy.
Austerity measures have already undermined the bedrock support the monarchy
used to enjoy in tribal communities and riots again broke out in 1996 when
bread prices doubled. Those riots indicated that with the kinds of measures
needed to stabilize Jordan’s economy and attract foreign investment, even
further democratization may not guarantee political stability. Unlike the
1989 riots that led to democratization, the 1996 riots were followed by
further repression clearly indicating that the monarchy is choosing
normalization of ties with Israel and a close alliance with the US over
internal democracy. Having lost the guaranteed support of the Bedouin
tribes at the same time that a new king without the power and prestige of
Hussein is about to take the helm, the monarchy seems to be banking on the
hope that as long as Jordan continues with the peace process, the US will
guarantee its survival through economic, and perhaps even military, support.
The Israeli and Turkish press has already hinted that Jordan has agreed to
enter into the growing Israeli-Turkish military alliance. If such
speculations are true, Jordan may be counting on using its strategic
location to extract new sources of economic rents rather than face the
realities of an increasingly global economic era.
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