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Jordan
Jaewook Song
Nov. 4
1. Introduction
According to Loriaux, financial liberalization can be explained by two arguments. One is the role of market forces, and the other is the importance of policy decisions in financially powerful states. Given these two categories, a series of Jordan’s recent economic reforms can be traced to the former force, though U.S. influence in Jordan has been tremendous in general.
In this paper, I would like to address the characteristics of the crisis and concomitant liberalizing measures. I will focus on the Jordan’s vulnerable economic condition, on autonomous regime capacity to reform fiscal structure successfully.
2. Crisis and IMF invitation
What are the sources of Jordan’s economic difficulties? The precipitous decline in oil prices in the mid-1980’s, as well as in Arab financial aid and inflow of worker’s remittances, created a serious debt situation for the kingdom.
The combination of these factors effected a slowdown of GDP growth to 4% in 1986. At the same time, the unemployment rate increased to 12%. The expansion due to oil wealth and high growth rates had only "obscured the fragility of the country’s true economic condition. Economic vitality was an illusion, pegged to foreign aid and overspending."
Oil money in boom years had allowed Middle Eastern countries to state monopoly. Likewise, Jordan’s revenue depended not on Palestinian business group, but on foreign aid that could be induced due to geopolitical importance. More heavily, Jordan depended on expatriate workers’ remittances that brought from oil capital.
The capital inflow passed through informal banking system. As such, they did not need to develop their own industrial bases and sophisticated formal financial system. The money also enabled the monarchy to implement extended distribution policies.
Jordan’s adoption of an International Monetary Fund’s restructuring program aimed at wiping out a foreign debt of $11 billion. The government has cut this debt by half in the past four years. But at a price. Unemployment is in fact probably nearer 20%. Stiff cuts in government spending, including the slashing of politically sensitive bread subsidies, have caused riots and popular discontent.
To make matters worse, the outbreak of Gulf War made repatriate workers from Saudi Arabia and Kuwait, where 90% of the workers were engaged. While seeking for another classic revenue, Hussein anticipated peace accord with Israel would silence the complaints. Nothing like this came to pass in Jordan. By that time, only $700 million debt to U.S. cancelled. Conversely, foreign grants have been reduced continually from 12.8% of GDP to 3.4% in 1994.
3. Political Setting
Jordan is a small nation with 4.3 million populations. The country is very vulnerable to regional security condition as well as economic fluctuation, especially oil price. However, Jordan regime as a monarchy has not been changed for four decades. The endurance is attributable to Hussein’s acute skill in dealing with various endogenous and exogenous challenges.
Jordanian political system has continued to revolve around Hussein. Hussein’s main power base continued to rest on the Bedouin-dominated army. And East-bank Jordanian occupied a dominant place in the existing power structure. In contrast, Palestinian descendents, who composed of over half of the population, have been limited in representation of highly ranked positions, though they have shown economic, cultural dominance. As such, the monarch profited from existing social, tribal cleavages and "enhance their relevance to the functioning of state power by perpetuating it".
In July 1988, fearing the effect of Intifada, Jordan formally relinquished its claim to the West bank and deferred to the PLO’s claim to represent the Palestinians living there. Subsequently, King Hussein dissolved the parliament, since half of its members were drawn from the West Bank.
After renunciation of subsidy for food, cost-of- living riots took place among urban population in April 1989. 1989 elections signaled the formalization of sweeping new liberalizing reforms in Jordan. Though parties were still banned, the 1989 elections signaled the formalization of sweeping new liberalizing reforms in Jordan.
The 1993 parliamentary election was an important milestone in the development of democracy in Jordan, since it was the first multiparty parliamentary election since 1956. The election reflected the preeminence of tribalism and regional identification over ideological or political affiliation.
However, after peace treaty with Israel, a series of political measures for liberalization withdrawn, and rigid authoritarian way of governing resumed. Consequently, in the November 1997 election, the lowest voter turnout happened since parliamentary election has been resumed in 1989. The result also reflected fettered political environment. Two thirds of the new parliamentary composed of tribal representation.
4. Banking System
Even though the recession of the 1980s worsened weaknesses within the banking system, culminating in the collapse of Petra Bank in 1989, the banking system has been one of the fastest growth sectors in the economy. The gross domestic savings per GDP increased from –17.4% in 1985 to 3.3% in 1994.
Also, the financial and banking sector in Jordan is well developed for the region. There are fifteen commercial banks, of which 5 are foreign ones and an Islamic bank. And there are six private investment banks, as well as one industrial development bank (IDB), and a specialized credit institutions. (Figure attached)
As Loriaux pointed out, Central Bank of Jordan might have functioned as an key pillar of intervention state before adjustment. Because of characteristics of foreign aid and remittance, we can easily assume that the bank allocated credit with discretion.
Central bank of Jordan periodically updates regulations of commercial banks in order to ensure the banking system protects the interests of the public by avoiding currency speculation. Although, the central bank has liberalized lots of direct control on interest rates, and has made some efforts to deregulate, intervention measures were still shown, for example, the case of AFM.
Jordan’s banking system can be classified into German model. The banking system is somewhat concentrated such that HHI ratio is 16.5%. Its two largest commercial banks, Arab Bank and Housing Bank, command about 50% of the total deposits. Jordan’s stock market has recently been organized to assure greater transparency, but the country is small and capital seems highly concentrated in palace circles.
However, total outstanding credit facilities of commercial banks increased from 20 % of GDP in 1970 to more than 60% of GDP in 1994, reflecting a deepening of private sector financing. Simultaneously, the role of the specialized credit institutions as major intermediating ones expanded considerably.
The establishment in 1976 of the Amman Financial Market (AFM) for trading in securities further enhanced performance of the financial system. AFM is one of the leading capital markets of the Middle East. The ratio of Jordan’s market capitalization to GDP stood at about 74% in 1992. Since expatriates returned after Iraq invasion of Kuwait, AFM had a doubling of share prices and a tripling of turnover, with market capitalization rising above $5 billion.
Yet, unlike other emerging capital markets, the AFM is dominated by domestic commercial banks and is characterized by low foreign participation. Furthermore, the AFM’s dramatic rise was halted by the intervention of the Central Bank in July 1993, which introduced measures to deter local speculators who were buying stocks with borrowed funds. Even Higher Court of Investment to scrap the 50% foreign ownership restriction on most listed stocks in 1997, the stock market remains less liquid than other regional bourses.
5. Economic Reform and macroeconomic performance
Economic reform in Jordan was easier than that of other Middle Eastern republics or Latin American countries. According to Haggard and Kaufman, cohesive regime type more easily overcome various social interests and can perform better the economic policy for adjustment than fragmented one. While Jordan is not the very case of cohesive military regime or dominant one-party system but a monarchy, the monarchy’s pragmatic crafting and practice, and more, their rigidity in policy performing based on strong state-autonomy similar to their categorized type.
The regime survived overcoming very vulnerable geopolitical stand as well as scarce resources for economic growth that inevitable for supporting their legitimacy. As a rentier state, they sustained with highly distributional characteristics of their expenditure, that is attributable to large foreign aid, a great deal of workers’ remittance from oil-exporting neighbors.
However, when the oil price plummeted in mid-1980s, they could not follow previous economic policies any longer. Different regional market force needed the regime to be adjusted the bust. But they have not enough available resources and institutions. They had only highly educated and skilled workers. Due to underdeveloped industrial basis, without any reasonable raw materials like oil, they could not easily adjust to new economic conditions. However, the key vulnerable factors exposed to external pressure were immature financial sector, and over-burdened debt. The different market force thrust the economic structure in crisis to nearly bankruptcy.
As a result, there was a rapid acceleration of the external debt-service burden, which led to the emergence of serious financial imbalances. Moreover, the sharply higher public sector debt-service payments further accentuated Jordan’s medium-term fiscal imbalance. In response to an easing of the credit stance and a large devaluation, the inflation rate started to accelerate to double-digit levels by 1988. By this time, commercial banks started to accumulate non-performing assets, leading to bank failures by the late 1980s; and access to external borrowing virtually ceased by 1988.
Macroeconomic performance since late 1991 are attributable to three key factors; first, restrained fiscal and monetary policy and prudent exchange rate management. Secondly, the regularization of external debt-service obligations. Finally, the effective absorption into the Jordanian economy of some 300,000 Jordanians from abroad, who brought with them substantial savings and technical know-how to revitalize the private sector.
6. Sectoral performance changes
We can observe the development of Jordan’s economy at large by the progress of individual sectors.
Around 60% of Jordanian emigrants worked in Saudi Arabia, and around 30% of worker abroad went to Kuwait. Meanwhile, much of the remittances were funneled back to Jordan through unofficial channels, which accounted for between 25% and 33% of the liquid money supply, and about 20% of GDP during late 1970s and early 1980s.
That exceeded export income or total foreign aid receipts. In 1983, they were 159.3% as a percentage of exports. Yet, they plummeted into 29% of exports in 1988.
Most of labor went abroad for seeking oil money, which left internal labor market very unstable. Highly skilled and educated labor force disproportionately moved for oil money, so internal labor market damaged by scarcity of certain skills and wage bid up. Given that, internal labor shortage led Jordan to import ‘replacement labor,’ usually low-skilled labor from Egypt and South Asia. The boom also fueled prolonged double-digit inflation, especially of housing prices.
However, Jordanian labor market was flooded by workers expelled from the Gulf. After that, the higher the education, the more likely was unemployment. Its rate of unemployment increased up to 20% around 1990s.
Three explanation address the cause of low private or foreign investment. First, private investment in Jordan fluctuated with the flows of workers’ remittances, which in turn depended heavily on movements in oil prices in the region’s oil-exporting countries. Secondly, the distorted structure of government preferential access to credit at administered interest rates. Thirdly, uncertainty about policy has made still unfavorable general macroeconomic environment more deteriorate.
However, direct and portfolio investment increased from 14.1 million JD in 1985 to 252 million JD in 1994. Importantly, there are still key impediments to invest. While important measures for financial liberalizing has been done, despite pledges, Jordan has not sold profitable state concerns or large stakes in firms listed on the stock market.
Starting the IMF program, total revenue increased from 24% of GDP in 1988 to 30% of GDP in 1994, with tax revenue increasing by 5% points. The increase essentially reflected frequent discretionary revenue-raising measures, as the structure of the tax system remained inelastic with respect to income. The revenue structure, however, improved with a decline in relative terms of taxes on foreign trade; and administrative procedures for collecting taxes and arrears were tightened.
During 1989-94, the average increase in central government expenditure and net lending was limited to 5.7%, and, accordingly, total expenditure as a proportion of GDP declined by 12% to 35% in 1994. Since 1990 regional crisis led to strong pressures on recurrent expenditures, supplementary expenditures had to be incurred during 1990-91. However, the authorities succeeded in accommodating these pressures without significantly hindering ongoing efforts to contain expenditures.
Jordan’s fiscal adjustment favorably affected its investment and growth performance. The fiscal debt of GDP has been largely reduced from 17.2% in 1988 to 6.4% in 1994.
Jordan’s trade structure has been characterized by large imbalance. The merchandise trade deficit amounted to 31.9% of GDP in 1994. Yet, export diversification has been propelled since 1988. We can infer the new trend from the two examples. The main exports goods were raw materials such as potash and phosphates, which accounted for 34.1% in 1989, accounted for only 19.4% of exports in 1994. As for imports, there has been a shift toward capital goods and raw materials: the share of capital goods increased from 21% in 1989 to 26% in 1994.
The principal trade partners in 1994 were other Arab countries, and EU. But the export was biased to other Arab neighbors (42.4%) and India (11.1%), etc. The relatively low share of the EU and Japan may be partly attributable to the still-dominant role of barter and protocol trade, the limited list of manufacturing products, as well as institutional barriers to access to those markets. Likewise, imports and exports partner and the trade quantities have not changed significantly with nearly same percentages.
The trade reforms initiated in late 1988 resulted in a more uniform tariff regime, with reduced variance in tariff rates. Tariff rate was widened from 318% maximum to duty free. They therefore lowered high tariffs while raising low tariffs so that the average tariff was broadly unchanged.
Though the authorities tightened the payments and exchange system to cope with balance of payments crisis in 1989, as the position improved, they gradually liberalized the exchange system, and by the end of 1992 Jordan had reverted to the liberal exchange system. The specific measures for liberalizing included as follows. In 1993, banks were authorized to offer foreign currency accounts to residents. Licensed banks and financial companies were authorized to offer investment portfolio management services to nonresidents in major foreign currencies. From January 1994, withdrawals and transfers from nonresident accounts were permitted freely.
7. Conclusion
As Loriaux’s first proposition, Jordan’s liberalization was driven mostly by different market force. Plummeted oil price have affected to oil-exporting nation’s fiscal structure, so foreign aid and remittances precipitated to reduce Jordan’s economic capacity rapidly.
Jordan is still engaged in this IMF restructuring program with the aim of diversifying its sources of capital inflows and reducing its dependence on remittances from national’s working abroad which totalled over $1 billion in 1996. Although there have been some improvements including continuing economic growth with 6% in 1996, some deregulation, edging down of tariff levels, stable exchange rate, but privatization has barely begun. However, in case of the monarchy having such a small size territory and shallow financial volume, radical privatization and openness are apt to threaten the regime’s autonomy, further the regime itself. That is why Jordan’s regime did not withdrawal in the process of liberalization and economic reform.
They just forced austerity policy to their people. Even though Hussein’s prominent crafting could have calmed various voice of political liberalization, those effort of economic reform are to be fragile without institutionalization and political liberalization. Because certainty and predictability are crucial to induce capital that is inevitable to survive or stabilize the regime in short term. More importantly, without simultaneous reform, their longer term growth is hard to be attained.
<Reference>
Andrew Album, "Stock Market review: Jordan," in The Middle East, February 1998
Alan Richards and John Waterbury, A Political Economy of the Middle East (Boulder, Colo.: Westview Press, 1996)
Clement M. Henry, "The financial Arms of industrial and political activity," a paper prepared for international conference, Tunis: 30 August- 2 September 1998
Economist, August 17, 1996
Edouard Maciejewski and Ahsan Mansur eds., Jordan; Strategy for Adjustment and Growth (Washington D.C: IMF, May 1996)
Euromoney, Dec. 1997
Frank Tachau, Political Parties of the Middle East and North Africa (Westport, Conn.: Greenwood Press, 1994)
Helen C. Metz ed., Jordan: a country study (Washington, D.C.: Library of Congress, 1991)
Kiren Aziz Chaudhry, Price of Wealth (Ithaca: Cornell Univ. Press, 1997)
Michael Loriaux et al., Capital Ungoverned (Ithaca: Cornell Univ. press, 1997)
Schirin H. Fathi, Jordan- An Invented Nation? (Hamburg: Deutsches Orient-Institut, 1994)
The Banker, October 1997
The Middle East, January 1998
The Middle East, Feb. 1998
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