74396 Policies for High and Sustained Growth for Job Creation Hashemite Kingdom of Jordan: 2012 Development Policy Review Policies for High and Sustained Growth for Job Creation Hashemite Kingdom of Jordan 2012 Development Policy Review Volume 1 – Synthesis June 30, 2012 Cover photos courtesy of: Left side photo: World Bank Photo Library Center photo: Joeyzaza at en.wikipedia Right side photo: iStockphoto Contents Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.  Jordan’s Long-Term Growth Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Jordan’s Performance From a Historic and Comparative Perspective . . . . . . . . . . . . . . . . . . . . . . 9 Market-Oriented Reforms and Shifts in Growth Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Large Scope for Increasing Investments and Productivity Still Exist . . . . . . . . . . . . . . . . . . . . . 13 2.  Improving the Institutional Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.  Strengthening Macroeconomic Stability through Fiscal Consolidation Reforms . . . . . . . . . . 17 Addressing the Moral Hazard Problem of “Easy� Foreign Grants . . . . . . . . . . . . . . . . . . . . . . . 17 Improving the Institutional Underpinning of Fiscal Management . . . . . . . . . . . . . . . . . . . . . . . 19 4.  Structural Reforms for Robust Growth and Job Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Growth Has Not Been Sufficient to Reduce Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 The Recent Nuances Introduced in Jordan’s Growth Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Trade Integration Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Business Environment Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Industrial Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Innovation Policies and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Figures Figure 1: GDP Growth: Jordan, MENA Average (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 2: Evolution of Jordan’s GDP per Capita (USD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 3: GDP per capita, Jordan versus Turkey (US$) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 4: GDP per capita, Jordan versus Croatia (US$) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 5: Difference in GDP per capita growth, Jordan versus Turkey . . . . . . . . . . . . . . . . 10 Figure 6: Difference in GDP per capita growth, Jordan versus Croatia . . . . . . . . . . . . . . . 10 Figure 7: GDP growth: Difference between Jordan and East Asia’s average . . . . . . . . . . . . 11 iii iv Policies for High and Sustained Growth for Job Creation Figure 8: FDI: A very high share of total investment in Jordan since the early 2000’s (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 9: Growth correlates strongly with changes in investment rates . . . . . . . . . . . . . . . 12 Figure 10: FDI inflows to Jordan and oil prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 11: Jordan’s GDP growth and oil prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 12: Jordan GDP and Total Factor Productivity Growth (%) . . . . . . . . . . . . . . . . . . . . . 12 Figure 13: Gross Fixed Capital Formation, total versus real estate (Million Jordanian Dinars) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 14: Share of Different Sectors in Gross Fixed Capital Formation (%) . . . . . . . . . . . . . . 13 Figure 15: Labor Productivity Decomposition (Annual growth rates in %) . . . . . . . . . . . . . . 14 Figure 16: Primary fiscal balance (Million JD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 17: Share of Foreign Grants in Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Figure 18: Ratio Domestic Revenues to Recurrent Expenditures . . . . . . . . . . . . . . . . . . . . . . . 18 Figure 19: Growth and Employment, 2000–2010 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Figure 20: Jordan – Skill Content of Total Employment by Sector (Share of tertiary educated employees in total, 2010) . . . . . . . . . . . . . . . . . . . . . . 23 Figure 21: Average Level of Labor Productivity vs Skill Content – Size of bubble is employment share (parenthesis) 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Figure 22: Employment Growth under Different Sector Growth Scenarios (2009–2016) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Figure 23: Jordanian Employment – Alternative Projections (2009–2020) . . . . . . . . . . . . . . . 27 Figure 24: Additional exports for typical JEPA beneficiary and JUMP beneficiary . . . . . . . 29 Tables Matrix of Policy Objectives and Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Boxes Box E.1: Performance and Growth Potential of Some of Jordan’s Key Strategic Sectors . . . . 24 Acknowledgements T his report was prepared by a team led by for Peace, Beirut). Chadi Bou Habib, Pilar Maister- Ndiamé Diop (team leader) and composed ra and Janette Uhlmann provided useful comments. of Wael Mansour, Marc Schiffbauer, Lida Lynn Chouman, Syviengxay Creger and Muna Bteddini and Ernest Sergenti (MNSED), Ramzi Abeid Salim provided excellent editing support. We Labidi, Julien Gourdon (consultant), Derek Chen, also thank the team at The Word Express, Inc. for an Marjo Koivisto and Kurt Larsen (WBI) and under excellent typesetting job. the supervision of Bernard Funck and the overall guidance of Manuela Ferro. Hedi Larbi, Country Director, has provided continuous support and List of contributors: guidance. The technical counterpart team in Jordan was composed of Dr. Mukhallad Omari and Bashar Volume 1 – Synthesis: Ndiamé Diop Soboh from the Studies Department at Ministry of Volume 2 – Individual chapters: Planning and International Cooperation. Chapter 1 – Growth and Employment: Lessons from the past 30 Years – Ndiamé Diop The report was prepared in close collaboration with Chapter 2 – Improving Institutions and State Or- the teams working on supporting Jordan’s Strategic ganizations for Better Policy Making Investment Framework (Jana Malinski and IFC col- and Implementation – Ernest Sergenti leagues) and Jordan Employment Strategy (Omar and Lida Bteddini Razzaz and Haneen Ismail Sayed). These teams are Chapter 3 – Strengthening Macroeconomic Sta- thanked for the excellent inputs provided to the DPR. bility through Fiscal Reforms – Wael Mansour and Ndiamé Diop The team thanks Dr. Jafar Hassan, Minister of the Chapter 4 – The Challenge of Transforming the Ministry of Planning and International Coopera- Economy and Creating Jobs - Ndiamé tion for his collaboration. The team thanks stake- Diop and Derek Chen holders in the private sector, civil society and the Chapter 5 – Trade Competitiveness and Export Pro- government who generously shared their thoughts motion – Julien Gourdon, Ana Mar- and suggestions during the course of preparing this garida Fernandes and Olivier Cadot study. Chapter 6 – Enabling Business Environment – Marc Schiffbauer Finally, the team also thanks the peer reviewers, Chapter 7 – Industrial Policy – Marc Schiffbauer Mathew Verghis (Sector Manager/Lead Economist Chapter 8 – Creating an Enabling Environment for Thailand), Marina Wes (Lead Economist for for Private Sector Innovation – Marjo Turkey) and Ibrahim Saif (Carnegie Endowment Koivisto and Kurt Larsen v Acronyms and Abbreviations AE Architectural and Engineering JGATE Jordan Garments, Accessories BOT Build-Operate-Transfer &Textiles Exporters Association DB Doing Business JIB Jordan Investment Board DFZC Development and Free Zones JTC Jordan Telecommunication Company Commission JUMP Jordan’s Upgrading and Modernization DOS Department of Statistics Program DPR Development Policy Review MENA Middle East and North Africa EAP East Asia and Pacific MFN Most Favored Nation ECA Europe and Central Asia MNSPR Middle East and North Africa Region, EU European Union Poverty Reduction and Economic FDI Foreign Direct Investment Management Department FTA Free Trade Agreement MoIT Ministry of Industry and Trade GAFTA Greater Arab Free Trade Agreement NES National Employment Strategy GDP Gross Domestic Product OECD Organization for Economic ICT Information and Communication Cooperation and Development Technology QAIA Queen Alia International Airport IMF International Monetary Fund SMEs Small Medium Enterprises JD Jordanian Dinar USAID United States Agency for International JEDCO Jordan Enterprise Development Development Corporation WBI World Bank Institute JEPA Jordan Export Promotion Activities WTO World Trade Organization vii 1 Overview J ordan’s quest for long-term, inclusive and sus- ment rate is 25 percent for women with a university tainable growth has remained largely elusive. By degree, while it is only 15 percent for women with the Growth and Development Commission’s less than a high school diploma. measure of success, namely, an average growth rate of 7 percent over 30 years, Jordan’s growth record This Development Policy Review (DPR) shows that cannot be dubbed “successful�.1 The country has sustaining growth and reducing unemployment is experienced spells of high growth but it has always possible: Jordan has a strong human capital base, faced the challenge of sustaining them. In the first a large endowment in engineers, doctors, accoun- half of the 1980s, Jordan’s GDP growth averaged tants, IT specialists and a substantial highly-skilled 7.4 percent. Subsequently, however, as the regional diaspora (500,000 educated Jordanians abroad, economies entered into recession in the wake of a 8 percent of the population). Furthermore, the sharp fall in oil prices, Jordan’s growth plummeted market-oriented reforms of the early 2000s have to –14 percent in 1988. It took about 18 years for made Jordan one of the most open economies in the Jordan’s GDP per capita to revert to its level in the Middle East and North Africa Region and have led late 1980s. In 2000–2008, Jordan posted an aver- to the emergence of dynamic non-traditional sectors age 6.7 percent growth. Then in 2009–10, when the global financial crisis hit Jordan, growth dropped 1 The Commission on Growth and Development, composed sharply to 2–3 percent. Jordan’s resilience to exog- of twenty-two leading practitioners from government, busi- enous shocks has remained extremely weak over the ness and the policymaking arenas worked for four years and last 30 years. gathered the best understanding there was about the poli- cies and strategies that underpinned rapid and sustained Difficulties in sustaining growth have not only pre- economic growth and poverty reduction. Thirteen coun- tries, which grew by an annual average growth rate of 7 per- vented Jordan from reaching a high income status cent were identified as successful cases. today.2 They have also hindered strong job creation for Jordanians and, as a result, unemployment re- 2 The World Bank classifies economies according to their mains high, especially for the youth and women. GNI per capita, calculated using the World Bank Atlas Close to 1 young individual in 3 aged 15–24 years method. According to the 2010 GNI, low-income coun- is unemployed; almost three-quarter of the pool of tries are those with a GNI per capita of, $1,005 or less; unemployed are young; close to one-fifth of women lower middle income countries, $1,006–$3,975; upper middle income countries, $3,976–$12,275; and high in- are unemployed; yet, only 15 percent of them par- come countries, $12,276 or more. Jordan’s GNI per capita ticipate in the labor market compared to 70 percent reached $4340 in 2010 and the country retrieved its Upper in East Asia. Moreover, unemployment dispropor- Middle Income country status in 2010 which it lost to a tionately affects educated people: the unemploy- Low Income one in the early 1990s. 1 2 Policies for High and Sustained Growth for Job Creation (e.g., information and communication technolo- organize. These background institutions are what gies, health tourism and business services). What is establish the incentives and constraints on policy- missing are (i) an adequate and stable institutional making. framework for policymaking and long-term busi- ness development; (ii) good fiscal policies to manage The above framework can guide the analysis of shocks and maintain macroeconomic stability; good growth performance in different settings, if care institutions and macroeconomic stability were iden- is taken to pre-identify the relevant binding con- tified by the Growth Commission as two of the five straints to sustainable growth. Applied to Jordan, a common characteristics of successful growth experi- large number of country case studies and discussions ences3 and (iii) further growth-enhancing structural with stakeholders in Jordan point to the criticality reforms. of 3 main areas for sustaining growth and reduc- ing unemployment: (i) the need for an adequate and stable institutional framework for policymaking Underlying analytical framework of and long-term business development; (ii) the need the DPR to improve fiscal policies to ensure macroeconomic stability, crucial for long-term growth and (iii) the The DPR considers a ‘growth model’ in which need to enhance structural reforms for growth to re- growth (and, for that matter, any development duce unemployment. outcome) depends on three key variables: policies, institutions and exogenous shocks (or luck).4 Both policies and institutions have an autonomous or Institutions/Governance direct impact on development outcomes and an indirect impact through the interaction between In Jordan, the implementation of policies and strat- policies and institutions. For instance, the impact egies, including in the area of growth, has been frus- of a well-though out policy can be totally muted trated by the (i) frequent changes in governments by weak institutions. Two countries can adopt the (average life of a government is less than 2 years); same policies and obtain different impact because of (ii) the frequent changes in policy priorities; (iii) the differences in the quality of their institutions. The relatively weak technical capacity and internal ac- underlying reasons can take many forms, including countability of parts of the public bureaucracy and; poor implementation, lack of trust in the policy- (iv) weak background organizations and institu- maker or implementer or a general lack of credibility tions that establish the incentives and constraints on of the reform. On the other hand, good institutions policymaking (the Parliament and other institutions tend to encourage governments to pursue policies in that ensure that the government is accountable). the public interest and foster good implementation. Meeting important strategic goals such as sustain- able growth, structural transformation and em- The DPR takes a broad view of institutions to in- ployment require time consistency, continuity and clude the organizations directly implementing policies and the background institutions that af- fect policy making and economic activities. These 3 The others common “ingredients� of successful countries background institutions are the legal and political are high investment and savings rates, global integration environment into which the bureaucracy and public and flexible product and factor markets. implementing agencies are embedded. They include 4 In other words, we posit that a given economic or social out- not just governmental organization of checks and come (e.g., growth) Y, is a function of the policies designed balances on the discretion of organizations and on to affect it (POL), the institutional framework within which the government itself—but also rules such as the the policies are implemented (INST) and luck or exogenous freedom of the press and the ability of citizens to shocks (EXO): Y = f (POL, POL*INST, INST, EXO) (1) Overview 3 frequent monitoring and evaluation, and this has public debt growing to crisis levels. The DPR dis- been a key weakness in Jordan. The formulation and cusses fiscal adjustment reform options but insists implementation of policies are strongly influenced on the need to strengthen the institutional under- by the background organizations and institutions of pinning of fiscal policy for lasting results. the State. The under each area are specific. But they will not take root until ongoing political reforms lead to greater external accountability. Such external Structural reforms accountability should engender the right incentives for the government and the civil servants to choose Improved institutions and fiscal policies will need the right policies, implement them properly and be to be complemented by sound growth strategy and accountable for the results. structural reforms if growth is to reduce unemploy- ment significantly. In 2000–2008, growth was main- ly underpinned by FDI to real estate and construc- Macroeconomic stability tion sectors which are intensive in foreign labor. The unemployment rate for Jordanians remained high. While monetary and exchange rate policies have In recent years, the Government has been emphasiz- been sound, poor fiscal policies have often been a ing promoting private investments in skill-intensive threat to macroeconomic stability in Jordan. Fis- sectors where Jordan has a comparative advantage cal policies in Jordan have remained, over the last and has demonstrated real capacity for exports. 30 years (i) overly pro-cyclical for a country so open High hopes are placed on growth of these sectors to and so exposed to exogenous shocks; (ii) too reliant reduce massive public sector queuing and the un- on foreign grants, which creates a moral hazard prob- employment rate of educated Jordanians. The DPR lem and undermines fiscal discipline and; (iii) too finds that this approach is sensible. Simulations of focused on the short-term. Poor fiscal policies have different sectoral growth scenarios indicate that ro- been costly for growth. In 1988–1989, a severe fis- bust, above average growth of skill-intensive sectors cal crisis led to a 14 percent decline in growth and it would reduce unemployment by 2016. However, took Jordan 18 years to retrieve the level of GDP per unemployment would still hover around 10–11 per- capita it reached in 1987 (see below). The country cent. Thus, continuation of cross-cutting growth is currently facing a challenging fiscal crisis, driven policies will be crucial to ensure permanent discov- partly by partly by fiscal policies and partly by ex- eries of new activities and to promote growth in all ogenous shocks, including explosions of the Egyp- sectors. Specifically, structural reforms should aim at tian gas pipeline that provides Jordan with the gas improving the business environment for all firms in needed to generate electricity. The fiscal deficit rose an equal manner, strengthening Jordan’s trade pro- to 11.9 percent in 2011, from 7.7 percent in 2010. motion programs, improving the transparency and Following commendable efforts to reduce public accountability framework of industrial policies, and debt in 2000–2008, the latter is on the rise again adopting a modern and more comprehensive, pri- (71 percent of GDP in 2011 in gross terms, against vate sector-led approach to innovation. 58 percent in 2010). Unfortunately, major down- side risks emanating from the political situation in Jordan, the regional situation, and the impact of the 5 FDI (10  percent of GDP), remittances (10–15  percent euro zone crisis on the global economy weigh nega- GDP) and tourism (4 percent of GDP) are all expected to tively on short-term growth.5 Unfortunately, Jordan grow slowly or contract in 2012. Slowdown in these factors, combined with rising energy and import bills, have already has no choice but to addressing the fiscal situation led to declining reserves since September 2011 and an in- urgently. Indeed, with low growth and higher bor- crease in financing needs. Jordan has lost about 1  billion rowing costs (risk premium in the region), a reduc- dollars in reserves since then but fortunately still has about tion of the primary fiscal balance is required to avoid $10 billion, or about 5 to 6 months worth of imports. 4 Policies for High and Sustained Growth for Job Creation The current context of Jordan Arab Awakening reforms to enhance fiscal sustainability and macro- provides an opportunity to address political and in- economic stability; Chapter 3 looks at why growth stitutional reforms in view of creating an enabling over the past decades has not significantly reduced environment for sustained growth and macroeco- unemployment. Using the lessons learnt from this nomic stability. Satisfying the population’s demands past experience, Chapter 4 discusses different sce- for political and governance reforms seems crucial narios of structural transformation and their impact to enhance the acceptance of the sacrifices required on jobs; finally, Chapters 5 to 8 respectively discuss to advance fiscal consolidation reforms. In other challenges and reform options in the areas of trade words, political/governance reforms and fiscal con- integration, the business environment, industrial solidation reforms have become inseparable. Politi- policy and innovation policy. cal/governance reforms are also a pre-requisite for restoring investor confidence and unlocking long- The DPR builds on and complements Jordan’s Na- term growth if accompanied by structural reforms tional Employment Strategy (NES) concurrently such as those highlighted above. prepared. The NES derives its vision from Jordan’s National Agenda and provides a thorough analysis The report is organized in two Volumes. Volume of Jordan’s labor market.6 Its strategic approach fo- 1 provides a synthesis of the key findings and rec- cuses on three pillars: (i) economic policies that gen- ommendations of the DPR. Volume 2 is composed erate economic growth and quality jobs for Jorda- of the individual chapters. Chapters 1 and 2 focus nians; (ii) a well-trained and motivated labor force on the immediate reforms needed to create an en- and (iii) social protection of all workers. The DPR abling environment for sustainable growth. Chapter focuses on the first pillar of Jordan’s NES. 1 shows how political and governance reforms are crucial to sustain stability and enhance accountabil- ity, which conditions the quality of policy choices 6 The National Agenda is a comprehensive, forward-looking and their implementation; Chapter 2 analyses the blue print for Jordan’s development elaborated in a partici- key weaknesses in fiscal policy and outlines priority patory way in 2005. Matrix of Policy Objectives and Actions Reforms Policy Objective Action Time Horizon I. Strengthening institutions Align political institutions and Greater External/Political Accountability: Short-term policy-making incentives with i. Continue with the reforms of the Electoral System and the Political Parties framework to enhance political inclusion and increase promoting general interests of political competition the population, and enhance ii. Move towards a system in which the Prime Minister and the government reflect the composition of the Parliament and are more political competitions and accountable to the Chamber of Deputies. accountability. iii. Continue with the decentralization agenda where local governments are empowered with real administrative and financial powers. Ensure that civil servants have Greater Internal Accountability (within government) and Bureaucratic Empowerment: Medium-term the right incentives and means i. Strengthen the incentive framework within the public sector by adopting a human resource management framework that promotes to provide quality services to excellence and merit. citizens. ii. Change recruitment practice by linking recruitment to specific skills and qualifications needed rather than recruiting on the basis of generic diplomas; iii. Improve coordination mechanisms at policy-making and technical levels to improve policy implementation; and engage in proactive government communication. iv. Establish technical multi-sector working groups with defined work programs and deliverables overseen by a public sector cabinet sub-committee. Ensure that citizens have Greater Voice to Civil Society Organizations: Medium-term access to information and are i. Broaden and formalize pre-existing evaluation mechanisms. One example is to broaden the KACE surveys to incorporate customer free to organize and provide improvement suggestions and feedback, and inputs on simplification of forms, processes, workflow, and roles. feedback to political leadership ii. Institutionalize civil society initiatives such as: for external and internal • Promoting greater information-sharing. accountability to work. • Reinforcing the availability of data and assessments more widely to the public. • Strengthening the Access to Information Law. • Adopting a government-wide public consultation policy. II. Improving fiscal policy Undertake fiscal adjustments Addressing the Moral Hazard Problem: Medium-term to reduce budget deficit and i. Reduce dependence on foreign grants. ensure fiscal sustainability in ii. Contain spiraling wage bill Jordan. iii. Reduce price subsidies while improving the targeting of cash transfer to the neediest iv. Reduce tax exemptions. (continued on next page) Overview 5 6 Matrix of Policy Objectives and Actions (continued) Reforms Policy Objective Action Time Horizon Tackling macroeconomic Improve Institutional Underpinnings of the Fiscal Policy: Medium-term instability through institutional i. Make fiscal commitments clear via fiscal targets set out in a medium-term fiscal framework, with clear and transparent procedures reforms that changes the for implementation and/or current pro-cyclical fiscal policy. ii. Adopt fiscal rules (on both debt and expenditures) and/or iii. Create and independent fiscal body insulated from political pressure. III. Implementing new generation of structural reforms III.1 Trade Policy and Export Promotion Diversify export destinations, Revisiting Export Promotion Activities (EPA): Medium-term deepen export sophistication, i. Orient future export promotion programs more on established firms that know how to export as export promotion programs have a and enhance quality of exported stronger impact on existing markets and products than new markets and products; goods. ii. Future programs should identify specific markets (e.g., markets with which Jordan has signed a Free Trade Agreement) and assist established firms to penetrate them durably. iii. Revise the design of the JUMP program as to have a greater (indirect) impact on the intensive margin of export growth (greater exports of existing products in existing markets). III.2. Business Environment Minimize discretion in Business Environment-Related Public Administration Reforms: Medium-term Policies for High and Sustained Growth for Job Creation business environment policy i. Transfer responsibilities and decision-making to lower tiers of the public administration; at the same time institutionalize the public implementation and in official’s administration by making (lower tier) civil servants accountable to a broader base instead of a single minister or high rank official. incentives to discriminate ii. Provide specialized training for government officials especially on regulatory issues. between firms. iii. All representatives from the different government agencies must have the authorities to grant the corresponding approvals in one- stop shops, while conflicts between regulators must be addressed in order to effectively speed up the length of procedures. Boost investors (local and Reduce Policy Implementation Uncertainty: Medium-term foreign) confidence in the i. Transform temporary laws into regular legislation status. stability of the business ii. Strengthen the dialogue between the government and the private sector on issues of new regulations, industrial policies, incentive processes in Jordan. schemes or other; and make them more frequent, systematic and on equal basis. iii. Streamline the number of authorities and institutions responsible for policy implementation, improve the communication between them, and remove overlapping responsibilities. Enhance local government Reforms at the Municipality Level: Short to Medium- efficacy in providing better and term i. The new municipality law to provide incentives for local administrations to improve their economic performance. faster services to businesses. ii. Review business processes at municipalities, especially Greater Amman Municipality, to reduce large variations in waiting times for services. III.3. Innovation (continued on next page) Matrix of Policy Objectives and Actions (continued) Reforms Policy Objective Action Time Horizon Create and enabling Broadening, re-calibrating and Increasing the Efficacy of Innovation Policy: Short -term environment for private sector i. Develop and national innovation strategy. innovation. ii. Establish long-term innovation leadership that outlasts changing governments. iii. Establish sectoral priorities in the National innovation strategy with focus on competitiveness enhancing policies Expand access to finance for Create a funding strategy and specific financing mechanisms for innovation activities across sectors in consultation with the Short-term innovative firms. private sector (e.g.: credit guarantee schemes). III.4. Industrial Policy Streamline current industrial Provide support for sectoral priorities and cross-sectoral reforms: Medium-term policies and focus on enhancing i. Focus on competitiveness enhancing policies. inter and intra sectoral ii. Breaking down monopolies in productive sectors to enhance competitiveness (e.g., ICT sector). competitiveness. iii. Retraining and further skills development, by the public and the private sectors. Note: Short-term = up to one year, Medium-term = up to three years, Long-term = up to five years and beyond Overview 7 2 Jordan’s Long-Term Growth Performance Jordan’s performance from a historic Figure 1. GDP Growth: Jordan, MENA and comparative perspective Average (%) Market-oriented reforms and an exceptionally favor- 25 20 able external environment in 2000–2008 propelled 15 Jordan’s economic growth to 6.7 percent over the last 10 decade. This performance was better than MENA’s 5 0 average, which stood at 4.5 percent in that period. –5 As Figure 1 shows, Jordan has consistently outper- –10 formed MENA in terms of GDP growth since the –15 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 late 1990s in spite of high oil prices, which increased growth in the resource-rich countries. The only ex- Jordan MENA ception was during the recent global financial crisis Source: World Development Indicators, World Bank. in 2009–2010 when growth fell much more sharply in Jordan, stopping the accelerated growth spells observed since 2004. This sharp decline in growth Figure 2. Evolution of Jordan’s GDP per since 2009 is a sign of Jordan’s weak growth sustain- Capita (USD) ability, due to its strong ties to the Gulf economies (see below). 5000 4500 4000 Jordan has however a long way to go to make up for 3500 3000 its lost ground and catch up with the best growth 2500 performers in the world. Following a severe fiscal 2000 1500 crisis in 1989, Jordan’s GDP per capita dropped for 1000 a decade and the country descended from an upper 500 middle income to lower middle income status ac- 0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 cording to the World Bank’s income classification (Figure 2). Only after 20 years did Jordan revert Source: World Development Indicators, World Bank. back to an upper middle income status in 2010. Furthermore, as figures 3 to 7 illustrate, Jordan fac- East Asia. In 1980, Jordan and Turkey had similar es formidable challenges to catch up with the best GDP’s per capita. In 2010, Turkey’s GDP per capita growth performers in Europe and Central Asia and was 2.2 times higher than Jordan’s ($10,000 versus 9 10 Policies for High and Sustained Growth for Job Creation Figure 3. GDP per capita, Jordan versus Figure 6. Difference in GDP per capita Turkey (US$) growth, Jordan versus Croatia 12000 30 10000 8000 20 6000 10 4000 2000 0 0 –10 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 –20 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Jordan Turkey Source: World Development Indicators, World Bank. Source: World Development Indicators, World Bank. $4,500). The divergence between Jordan and Croa- tia until 2004 is even starker. The two countries had Figure 4. GDP per capita, Jordan versus similar GDP per capita (around $2000) in 1992.7 Croatia (US$) Eighteen years later, Croatia’s GDP per capita is 3 times higher. Jordan would have to grow much fast- 20000 er than Turkey and Croatia for a prolonged period 15000 to catch up with them. 10000 5000 Over the last decade, Jordan did grow on average 0 faster than Turkey and Croatia, by 1.7 and 3.1 per- centage point margins respectively (Figure 5 and 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Figure 6). However, when observed in per capita Jordan Croatia terms, the difference in growth vanishes. This means Source: World Development Indicators, World Bank. that for Jordan to catch up with these countries, it needs an even higher growth in per capita terms, since its population growth is higher (+2.9 per- cent in Jordan versus 1.3 percent in Turkey and –0.17 percent in Croatia). Figure 5. Difference in GDP per capita growth, Jordan versus Turkey Jordan’s catch-up challenge is even more daunting when compared with East Asia (Figure 7). Vis-à- 15 vis East Asia, Jordan is actually not converging in 10 growth, but diverging in growth with a shortfall 5 of about 2.5 percentage points vis-à-vis East Asia. 0 Catching up with East Asia in per capita terms –5 would mean a per capita GDP growth rate 5 per- –10 centage points higher than its average rate in the –15 –20 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 7 The story holds when GDP per capita is measured in con- stant 2000 US $ even the countries do not start with similar Source: World Development Indicators, World Bank. GDP per capita in constant US $ terms. Jordan’s Long-Term Growth Performance 11 Figure 7. GDP growth: Difference between Figure 8. FDI: A very high share of total Jordan and East Asia’s average investment in Jordan since the early 2000’s (%) 5 30 0 25 20 –5 15 –10 10 5 –15 0 –5 –20 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 –25 Private Investment (total) FDI Total In ows 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Source: World Development Indicators, World Bank. key drivers of growth in Jordan. Net FDI inflows 2000s. Thus, Jordan has a long way to go to match tripled to US$2.8 billion in 2008 compared with the best performers around the world such as Ma- US$0.9 billion in 2000, and averaged 10.1 percent laysia, Thailand, Indonesia, Singapore and Korea. It of GDP over the decade. This compares with an av- will take a generation of sustained good performance erage of 2.4 percent of GDP for MENA countries, to catch up and become a high income country. 3.1 percent of for ECA countries and 3.2 percent for East Asia countries. For Jordan, FDI has become a key component of capital formation, account- Market-Oriented Reforms and Shifts ing for 44 percent on average over the past decade, in Growth Drivers much higher than the average in lower middle in- come countries (7.3 percent) and the rest of non- Jordan decisively embarked on trade liberalization GCC MENA countries (6.1 percent). Jordan’s large reforms and privatization in 2000. Of particular FDI inflow is behind the doubling of gross capital importance were the reforms of property rights un- formation between 2000 and 2008 (US$1.7 to dertaken as part of the WTO adhesion (2000), re- US$3.4 billion or 24 percent of GDP in 2008).8 inforced with the signing of a Free Trade Agreement In turn, large increases in capital formation fueled (FTA) with the EU (1997) and the United States GDP growth which, as Figure 9 shows, fluctuates in 2001. The FTA with the US followed the sign- strongly with the investment rate.9 ing of an earlier “Qualifying Industrial Zone� agree- ment with the US that gave Jordanian exports from The rapid increase in FDI reflects two main factors: “qualified zones� quota-free and duty-free access to the rise in oil prices and excess savings in Arab oil the U.S. market under advantageous rules of origin. Although non-tariff measures remain, Jordan has become one of the most open economies in MENA 8 FDI inflows average 10.6  percent of GDP in the period 2000–2008, among the highest in the region. with a trade-to-GDP ratio above 100 percent and low tariffs (see Chapter 6). 9 The preeminence of FDI in Jordan’s growth process in the last decade contrasts with the 1990s, during which FDI As a result of market reforms, FDI and productiv- played no role as domestic investment was financed by do- ity growth have become, since the early 2000’s, the mestic savings. 12 Policies for High and Sustained Growth for Job Creation Figure 9. Growth correlates strongly with Figure 10. FDI inflows to Jordan and changes in investment rates oil prices 50 4000 120 40 3500 100 3000 US$ per barrel 30 2500 80 2000 US$ 20 1500 60 10 1000 40 500 20 0 0 –10 –500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 –20 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 FDI Oil Prices Private Investment (including FDI) GDP Growth Total Investment Source: World Development Indicators, World Bank. 10 At least a part of FDI inflows to Jordan is linked to the exporters. More than 50 percent of FDI to Jordan comprehensive privatization program implemented be- comes from regional oil exporters, in particular tween 2000–2008. According to a recent World Bank re- countries of the Gulf and Iraq. The rise in oil prices port, privatized firms made over $1  billion in capital in- vestment during 2000–2007, which equates to 11.4 percent and excess savings in these countries since 2003 has of overall foreign direct investment (FDI). The privatiza- led to massive FDI outflows, a portion of which ben- tions included the Jordan Telecommunications Company efitted Jordan. Figure 11 shows the strong correla- ( JTC) (2000, 2002); the Arab Potash Company (2003); tion between oil prices and FDI flowing to Jordan.10 the Jordan Phosphate Mines Company (2005); seven avia- tion sector businesses, including Royal Jordanian Airlines As mentioned above, alongside FDI, total factor pro- (2000–2007); and three power sector companies (2007). In addition, two major public-private partnership transac- ductivity (TFP) has emerged as a key driver of growth tions were concluded: a management contract for the Port in Jordan since the early 2000’s. This contrasts sharply of Aqaba container terminal and a build-operate-transfer with the previous two decades, during which TFP was (BOT) transaction to develop a new passenger terminal at a drag on growth. The rise in TFP reflects a greater Queen Alia International Airport (QAIA). Figure 11. Jordan’s GDP growth and Figure 12. Jordan GDP and Total Factor oil prices Productivity Growth (%) 9.0 100 10 8.5 8.0 90 8 7.5 Oil Prices US$ per barrel 80 6 Real GDP Growth (%) 7.0 6.5 70 4 6.0 5.5 60 2 5.0 4.5 50 0 4.0 40 –2 3.5 3.0 30 –4 2.5 1980–1989 1990–1995 1996–2000 2001–2005 2006–2008 2009–2010 2.0 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TFP Growth GDP Growth Jordan’s Long-Term Growth Performance 13 openness to trade and FDI and a greater role of the Figure 13. Gross Fixed Capital Formation, private sector in backbone services (finance, telecom- total versus real estate (Million Jordanian munications, transports, the Aqaba port, etc.), tra- Dinars) ditionally managed inefficiently by the public sector prior to the 2000’s. In contrast, the decline in TFP 5000 in the previous two decades was linked to the heavy 4000 control of the state on business, the pervasiveness of 3000 2000 inefficient state-owned enterprises, the heavy regula- 1000 tion of factor markets and limited trade openness. 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total Investment (gross xed capital formation) Large Scope for Increasing Investment in Real Estate Investments and Productivity Still Exist FDI is likely to continue to contribute positively to Figure 14. Share of Different Sectors in overall growth once the current political situation Gross Fixed Capital Formation (%) stabilizes but Jordan’s challenge is to diversify both 100 their origin and sectoral allocation. The high concen- tration of FDI origin—mainly from the Gulf Coun- tries—has created a strong “covariance� risk between 50 oil price and FDI and growth in Jordan. FDI to Jor- dan fluctuate with the vagaries of international oil 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 prices as seen above. The risk of growth volatility is further increased by the narrow sectoral allocation Share of Real Estate of these investments. The real estate claims close to Share of Public Administration 50 percent of total investments in Jordan and drive Share of Manufacturing aggregate investment (Figure 13 and Figure 14). Share of Tourism (hotels and restaurants) Share of Transport and Telecom Going forward, boosting domestic and foreign in- vestments in non-real estate sectors, which are so far very low, should be a priority for Jordan. As discussed below, the government’s growth strategy low to high productivity sectors. The last decade has focuses on putting in place policies to boost private seen productivity growth driven by within sector investments in some emerging high-skilled sectors, productivity growth with a negative contribution of where Jordan has demonstrated a strong potential structural change (Figure 15).11 In the years to come for growth and where it has a comparative advan- more investments (including FDI) in the emerging tage. Jordan’s economy has started to structurally change with greater openness and global integra- tion and this process is quite recent (a decade or so). 11 Labor productivity in an economy grows in one of two ways Jordan’s challenge is thus competing with early and (see McMillan and Rodrik 2011). First, productivity can grow within economic sectors through capital accumula- more mature reformers with more mature and de- tion, technological change, or reduction of misallocation veloped private sectors (see below). across firms. Second, labor can move across sectors, from low-productivity sectors to high-productivity sectors, in- There also exists a large potential for further produc- creasing overall labor productivity in the economy (struc- tivity increases from the movement of labor from tural change). 14 Policies for High and Sustained Growth for Job Creation Figure 15. Labor Productivity sectors would not only accelerate the structural Decomposition (Annual growth rates in %) transformation of the Jordan economy (i.e., increase the size of emerging non-traditional sectors), it can increase productivity and GDP growth in a virtu- 1994–2008 2.15% 0.36% ous cycle. Although within sectors, one detects the emergence of a few new sub-sectors (such as ICT, 1994–1999 –0.13% 1.28% medical tourism, etc.), at the aggregate level, Jor- dan’s has undergone little structural change and the 2000–2008 –0.51% 3.48% traditional sectors largely dominate the economy –0.50% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% (see below). 3 Improving the Institutional Framework I n addition to being important in their own right, rents, since they are more likely to believe that there political and governance reforms are needed to is no rent for anyone else. The perception that some advance economic reforms in Jordan. His Maj- other members of society are getting rents is a key esty King Abdullah II’s statement at the World Eco- deterrent to reform. Opinion polls indicate a high nomic Forum in October 2011 summarizes well the level of dissatisfaction with Jordan’s government key links between political and governance reforms and Parliament. One appropriate policy response is and economic reforms and outcomes: “Political re- greater transparency and credibility. form is economic reform. For businesses to invest and expand with confidence, they need a predict- In this DPR, we examine many components of the able, level playing-field, transparency and account- political and public administration context, often ability, the rule of law and a strong, stable founda- lumped together under the general rubric of “insti- tion of inclusive political life.� His Majesty King tutions�. That is, we analyze both the foreground set- Abdullah provided further guidance for political ting (the public bureaucracies charged with directly reforms in his speech opening the 16th Parliament’s implementing policies) and the background setting second ordinary session on October 26, 2011: “Our (the political institutions, or rules that regulate how priority today is political reform. Now, we need to the different State organizations interact with each build the legislative foundations on which political other and with the public). The technical capacity life can develop: new laws on election and political and internal accountability of the public bureaucra- parties, independent election commission and con- cies are crucial determinants of their effectiveness. stitutional court, as well as other legislation to im- No less important are the background organizations plement the constitutional amendments.� and institutions, in which the public bureaucracies are embedded. Background organizations include Political and governance reforms are particularly the government and the Parliament; while back- crucial to enhance political support for sensitive re- ground institutions include the level of checks and forms. The subsidy reform is an example. Greater balances on the government, the degree of freedom transparency and credibility may help better convey of the press and the level of civil liberties. These the message that the fiscal crisis is severe and this background organization and institutions establish can help contain popular pressure for keeping the the incentives and constraints on policymaking. subsidies. Addressing governance issues may also help increase the acceptance of sacrifices. A result The formulation and implementation of policies, in- of the “rent-seeking� literature is that if rent-seekers cluding the ones discussed in this report, are strong- believe that a crisis that is reducing the availability of ly influenced by the background organizations and rents is severe, they are less likely to keep requesting institutions of the State. Given their importance, 15 16 Policies for High and Sustained Growth for Job Creation these background organizations and institutions, as trariness in implementation, and technical ca- well as their effect on the policy making process, are pacity weaknesses among technical Ministries’ systematically examined in this report. We identify staff. institutional and organization weaknesses over three • At the evaluation/accountability stage: Lack of stages of policymaking: impact evaluation, limited transparency and low contestability. • At the policy formulation level: A general public perception that past policies have failed; A lack The solutions recommended under each area are of genuine consultation in the policy making specific. But they will not take root until ongoing process and a lack of a comprehensive reform political reforms lead to greater external accountabil- plan which reflects that fact that the implemen- ity. Such external accountability should engender the tation of the National Agenda is partial and in- right incentives for the government and the civil ser- consistent; vants to choose the right policies, implement them • At the implementation level: Blurred ministe- properly and be accountable for the results. In other rial mandates, not enough coordination among words, Jordan needs a stronger and more represen- Ministries, frequent changes in Government tative Parliament, which holds the Government ac- and Ministerial leadership, discretion and arbi- countable, under the pressure of a freer civil society. Strengthening Macroeconomic 4 Stability through Fiscal Consolidation Reforms T hroughout the last decade, Jordan’s fiscal Figure 16. Primary fiscal balance situation worsened and fiscal policy proved (Million JD) unable to protect the country from large shocks. Fiscal policy has been largely pro-cyclical, 400 expanding in booms and contracting in reces- 200 sions—a pattern that has made it a major source 0 of macroeconomic instability. For instance, while –200 GDP growth averaged 8.1 percent in 2004–2008, –400 the primary fiscal deficit excluding grants stood at –600 6.6 percent of GDP and the overall deficit exclud- 1999q3 2002q1 2004q3 2007q1 2009q3 ing grants averaged 9.3 percent. In 2011, the sharp Time decline in growth coincided with a very large fis- Primary Fiscal Balance Trend_pfbeg cal deficit (11.2 percent of GDP), preventing the government from undertaking countercyclical fiscal Source: Ministry of Finance, Jordan. policy to restore growth. Following commendable efforts to reduce public debt in 2000–2008, the lat- ter is on the rise again (71 percent of GDP in 2011 Addressing the Moral Hazard in gross terms, against 58 percent in 2010).12 Be- Problem of “Easy� Foreign Grants cause Jordan’s capital account is open and the coun- try is exposed to shocks, prudent macroeconomic Jordan is an important recipient of grants from management is crucial to reduce volatility.13 the Gulf countries and the US thanks to its po- litical stability and diplomacy. The share of foreign To ensure fiscal sustainability, fiscal adjustment needs to take into account the root causes of the country’s poor fiscal outcomes. In Jordan, the high 12 In contrast with fiscal policy, Jordan’s monetary and ex- popular pressure for public spending appears to be change rate policies have favored macroeconomic stability. related to two factors: (i) a moral hazard problem cre- Monetary policy has been consistent with low and stable ated by easy access to foreign grants and (ii) political inflation and the real exchange rate has remained stable. economy factors and short-term focus of frequently 13 Dell’Ariccia et al. (2007) document a number of country changing governments. Reducing the dependence cases in which the implementation of prudent macroeco- on foreign grants through fiscal adjustment while nomic policies was an important factor in improving the strengthening the institutional underpinning of fis- growth benefits of financial integration, while minimizing cal management can help address these problems. potential risks. 17 18 Policies for High and Sustained Growth for Job Creation Figure 17. Share of Foreign Grants in Total to economic activity in the region and the global Revenues economy. Foreign Grants to Total Revenues (%) Foreign grants delay reforms by relaxing the coun- 35 try’s budget constraint through a “moral hazard� 30 phenomenon. They expose Jordan to changes in 25 the political and economic fortunes of its partners 20 also. The availability of large foreign grants encour- 15 ages fiscal current expenditures and deficits, thus 10 delaying important fiscal reforms. Figure 18 shows 5 that over the last decade, only once did domestic 0 revenues cover fully current expenditures. Except 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 in 2006, domestic revenues have always fallen short Source: World Development Indicators, World Bank, and Ministry of Finance, of current spending, not to mention total spending Jordan. (i.e., including capital spending). The persistence of this shortfall is a sign of a moral hazard, whereby for- eign grants are counted upon to fill the gap. There is grants in Government revenues is very high, aver- an established literature showing that capital inflows aging 15.2 percent between 2000 and 2011, with (including foreign grants) tend to contribute to a re- peaks in 2003 and 2004 (28 percent) and in 2011 duction in “precautionary� savings.15 Unfortunately, (22 percent). This dependence on external grants foreign grants are volatile and are mainly influenced creates a permanent fiscal policy risk, since foreign by factors beyond the control of Jordanian authori- grants fluctuate with the price of oil and the eco- ties (Figure 17). nomic fortunes of Jordan’s partners. For instance, external grants dropped from 14 to 7 percent of to- Reducing dependence on foreign grants requires de- tal government revenues between 2008 and 2009, cisive fiscal adjustment.16 For instance, one of the causing a dramatic widening in government’s bor- key sources of fiscal savings is subsidies. In 2011, rowing requirement.14 The fluctuations in foreign they represented 22.4 percent of total revenues or grants generate additional uncertainty for fiscal 5.9 percent of GDP (the equivalent of foreign grants policymakers in addition to the uncertainty related received that year). Subsidies in Jordan are regres- sive. Overall, the top income quintile receives over seven times more in subsidies that the bottom in- come quintile. Every dinar transferred to the bot- Figure 18. Ratio Domestic Revenues to tom two income quintiles through price subsidies Recurrent Expenditures costs the budget 6.3 dinars (IMF 2012). The leakage of benefits is especially pronounced in the case of Domestic Revenues to Recurrent Expenditures (%) 140 120 120 108 107107104 96 91 92 92 101 97 98 100 88 92 90 90 90 88 91 90 14 External grants totaled US$1 billion in 2008, US$469 mil- 80 79 73 lion in 2009, US$565  million in 2010 and more than 60 US$1.5 billion in 2011. 40 15 See Agénor and Montiel (2008). 20 0 16 An ongoing Bank policy note is focused on identifying and 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 examining the welfare distribution of various fiscal consoli- dation measures, considered by the Government. Strengthening Macroeconomic Stability through Fiscal Consolidation Reforms 19 gasoline, where top income quintile households re- “politicization� fiscal policy (just as monetary policy ceive 32 times more in subsidies. Well designed safe- was depoliticized by granting independence to the ty net programs can substantially reduce this leakage central bank) while enhancing fiscal transparency. of benefits to higher income groups and help protect the poorest households at much lower fiscal cost. International experience provides many examples of instruments that can be used to enhance the institu- Another avenue of fiscal reform is to contain the tional context for fiscal policymaking. One option is public sector’s spiraling wage bill, i.e., to make sure to require that fiscal commitments be made clear via that they grow at lower rates than the GDP. Indeed fiscal targets set out in a medium-term fiscal frame- the overall compensation of employees increased at work, with clear and transparent procedures for im- 6 percent per annum since 2006, against 5.3 per- plementation. The key advantage of this approach cent for GDP.17 This rapid growth reflects successive is that budgets take into account the consequences wage increases granted to civil servants and military of policies and help ensure adequate funding of personnel in the past five years; along with gener- medium-term programs. It has some flexibility since ous pension and retirement packages offered to em- fiscal deviations can be corrected gradually but the ployees of the defense sector. Given the large size of Government is obliged to clearly explain departure the public sector in the economy (one-third of GDP from a prudent path and take corrective actions to and 38 percent of total employment), increases in avoid sanction from the Parliament. This approach the wage bill are bound to have significant impact was adopted by New Zealand and Australia. on fiscal outcomes. Another avenue is to adopt fiscal rules. There is evi- Finally, fiscal adjustment should aim at reducing dence that when backed by sufficient political will, Jordan’s large tax exemptions. The latter have in- fiscal rules foster fiscal discipline (IMF 2009, Guich- creased significantly in the past decade (although ard et al. 2007). Fiscal rules are particularly suitable no official estimate exists). They have been used as to situations where political commitment is weak or instruments to stimulate foreign investments and where governments change frequently. Fiscal rules subsidize some domestic sectors in bad times (e.g., have been adopted by a large number of countries. real estate), and as a mechanism to enlarge the so- According to the IMF, in 1990, only seven coun- cial safety net through reduced sales tax on products tries worldwide had a fiscal rule; by 2009, they were deemed important socially. There is a need to assess in place in 21 developed countries, 33 emerging the amount of tax expenditures generated by these markets and 26 low-income countries (IMF 2009). exemptions and to devise an overall framework or Chile and Poland are known examples where fiscal strategy or specific guidelines for granting and ad- rules worked. ministering them. But fiscal rules present many shortcomings. For in- stance, rules can be harmful to the quality of fiscal Improving the Institutional adjustment, for instance, when growth-enhancing Underpinning of Fiscal Management public investment is cut to respect an expenditure cap (Blanchard and Giavazzi 2003). Jordan’s situa- Fiscal adjustment is, however, not enough to ensure tion illustrates this. The country has a debt law that fiscal sustainability in Jordan. The political economy stipulates that the public net debt to GDP should factors that undermine fiscal management need to be addressed. This requires reforming fiscal institu- 17 Both are measured in real terms. The compensation of em- tions to foster fiscal discipline without undermining ployees includes the wage bill for civil servants and military the Parliament’s democratic control on the budget. personnel, pension contributions and allowances and social Indeed, a key strategy is to somewhat reduce the assistance. 20 Policies for High and Sustained Growth for Job Creation not pass 60 percent as a rule. In 2010, a short- medium-term deficits or create fiscal sustainability), lived fiscal adjustment of 3 percentage of GDP was with delegated authority over requisite instruments achieved by cutting public investment while current (taxes); (ii) fiscal councils, mandated to carry out spending increased; when political will is absent, budget formulation or monitoring. rules can also motivate creative accounting and off- budget operations, undermining transparency and In brief, many options to address the weak institu- the democratic control of the budget; finally, if en- tional underpinning of fiscal policy exist. Unfortu- forcement mechanisms are weak, rules cannot play nately, Jordan’s experience with its debt law (a fis- their role of constraining policymakers.18 cal rule) has not been favorable. To more effectively ensure fiscal sustainability, advances in political and Finally, a third potential instrument to foster fis- governance reforms are crucial. cal discipline is to establish an independent fiscal body insulated from political pressure. For practi- cal purposes, fiscal policy would be delegated to an unelected but accountable body. Two types of fiscal 18 Again in the case of Jordan, the general provisions of such a law stipulate that the specific debt limit rule article would body exist, depending on the scope of the mandate come into force only if it is specifically and separately ap- and the way they function: (i) independent fiscal au- proved by the Council of Ministers. Such an approval has thorities, which, similar to central banks, have the never materialized. So de facto, the 60 percent debt limit is mandate to achieve fiscal objectives (such as to lower not binding legally. 5 Structural Reforms for Robust Growth and Job Creation I mproved institutions and fiscal policies will Growth has not been sufficient to need to be complemented by sound growth reduce unemployment strategy and structural reforms if growth is to reduce unemployment significantly. In 2000– Annual growth reached 6.7 percent annually in 2008, growth was mainly underpinned by FDI to 2000–2008. This growth “generated� a net employ- real estate and construction sectors which are in- ment growth of 2.9 percent annually. In absolute tensive in foreign labor. The unemployment rate terms, 457,000 net jobs were created. Yet, unem- for Jordanians remained high. In recent years, the ployment dropped only slightly, from 14.9 percent Government has been emphasizing promoting pri- to 13.6 percent. A closer scrutiny of the data shows vate investments in skill-intensive sectors where that 42 percent of the jobs were created in the public Jordan has a comparative advantage and has dem- sector and 58 percent in the private sector. Among onstrated real capacity for exports. High hopes are those created in the latter, more than half were cap- placed on growth of these sectors to reduce massive tured by foreign workers. Job creation for Jordanian public sector queuing and the unemployment rate citizens in the private sector stood at a mere 28 per- of educated Jordanians. The DPR finds that this cent of all the jobs created in 2000–2008. strategy is sensible. Simulations of different sec- toral growth scenarios indicate that robust, above In the private sector, job growth was highest in average growth of skill-intensive sectors would “foreign worker-intensive sectors�, including tour- reduce unemployment by 2016. However, unem- ism and hospitality (8.4 percent annually in 2005– ployment would still hover around 10–11 percent. 2009), construction (6.6 percent) and retail trade, Thus, continuation of cross-cutting growth policies textiles and clothing. Job creation in the above sec- will be crucial to ensure permanent discoveries of tors was high but real wages were stagnant or declin- new activities and promote growth in all sectors. ing (textiles).19 In contrast, job growth was below Specifically, structural reforms should aim at im- average in the telecom and ICT-enabled services, proving the business environment for all firms in an equal manner, strengthening Jordan’s trade pro- motion programs, improving the transparency and 19 Foreign workers captured a significant share of the jobs cre- ated in these sectors. Foreign workers, who accounted for accountability framework of industrial policies, 13 percent of total labor force in 2009, are concentrated in and adopting a modern and more comprehensive, construction (35 percent of workers in this sector), textiles private sector-led approach to innovation. and clothing (30 percent), hotels and restaurants (28 per- cent), wholesale and retail trade (12 percent). While these sectors absorbed a large number of jobs, they experienced the least growth in real wages over the last decade. 21 22 Policies for High and Sustained Growth for Job Creation non-textile manufacturing, mining and other indus- ing the overall unemployment at high levels. In the tries (energy, water, etc.). In other words, apart from ECA and EAP regions, labor force growth stood at the financial sector, job opportunities in the private a mere 0.8 percent per annual between 2000–2009, sector were lowest in these skill-intensive sectors implying that most countries in these regions need which educated Jordanians predominantly “target� only a fraction of the employment growth realized by when seeking jobs. Jordan to reduce unemployment. Jordan’s working age population has increased significantly in the last Queuing for public sector jobs has thus been mas- decade (reflecting high fertility rates in the 1980s) sive with the public administration, defense, and se- and is predicted to continue growing fast in the next curity sector which registered a 7.1 percent annual decade. From 3.4 million in 2009 (or 57 percent of growth rate in net job creation in 2000–2009. In the population), the working age population is ex- 2010, about 218,000 applicants were queuing for pected to reach 4.4 million in 2020 (or 67 percent openings in the public sector according to the Civil of the population). Assuming a labor force growth Service Bureau. The queuing phenomenon reflects rate of around 2.7 percent per annum, in order to large distortions between public and private sec- reduce unemployment, employment growth would tors wages and compensation. In 2010, the aver- need to be greater than 3 percent. age monthly wage in the public sector was JD412 compared to JD338 in the private sector; the pub- lic sector pays about 70 percent of private sector The Recent Nuances Introduced in wages for managerial and technical levels and about Jordan’s Growth Strategy 150 percent of the private sector for unskilled and semi-skilled levels! (Jordan National Employment Jordan’s growth strategy is traditionally based on Strategy, 2012). trade openness and continuous improvements of the business environment through reforms of business This distribution of jobs between public and pri- regulations, enhancements of key infrastructures vate sectors is unsustainable: (i) a large number of and strengthening the education system. In recent educated people are under-employed in the public years, the Government has emphasized the need sector and a large number of people in the private to promote investments and innovation in specific sector are frustrated with few job opportunities or stagnant or declining real wages; (ii) the public sec- tor, including administration, defense and security already employs 38 percent of the labor force and Figure 19. Growth and Employment, is bloated. 2000–2010 (%) Thus it is imperative to enhance the scope for job 20 10 creation in the private sector in the years to come. 15 8 This requires a rapid growth of skill-intensive sec- 6 tors which hold high hopes for employing edu- 10 4 cated Jordanians. The growth rate required is also 5 2 high because Jordan’s labor supply growth is high (youth bulge). Over the last 10 years, Jordan’s labor 0 0 2011q1 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 force grew at an annual growth rate of 2.7 percent. Against this backdrop, Jordan’s respectable 2.9 per- Real GDP Growth (%) cent annual growth in employment was not enough Unemployment Rate, total (%) to absorb the new entrants and significantly reduce the stock of unemployed in the labor market, leav- Source: WDI and Department of Statistics, Jordan. Structural Reforms for Robust Growth and Job Creation 23 sectors in view of “redirecting the economy towards Figure 20. Jordan – Skill Content of Total sectors and activities based on knowledge anchored Employment by Sector (Share of tertiary on its vast pool of talent and expertise�. To that ef- educated employees in total, 2010) fect, following a very large number of sectoral stud- ies (more than 30 in the last 6 years), a few sectors 82.7 80 77.3 in which Jordan has comparative advantage were 70.773.0 62.7 identified as holding high hopes for accelerating the 60 59.0 economy’s structural transformation. These sectors 45.2 include information and communication technol- 40 35.5 28.932.7 25.625.9 ogy services (ICT), the pharmaceutical sector, busi- 19.820.220.5 20 13.313.515.115.2 ness services (including auditing, accounting, legal 0.0 and architectural services), financial services, educa- 0 Fishing Transport Agriculture Construction Other Hotels & Mining & Trade Public Others Other Real Total Utilities Pharmaceuti Telecom & Business Health Other Financial Banking Education tion services, and health services (including health tourism). The strong externalities (or social benefits) associated with growth in these strategic sectors, not captured fully by markets, provides a rationale for public support. Thus while emphasizing improve- Source: DOS, Jordan. ments in the business environment, trade and edu- cation reforms as well as infrastructure development benefiting all sectors, additional effort is deployed that they expand their market shares in regional to remove the sector-specific obstacles and overcome and international markets, their contribution to the market failures that prevent the rapid expansion the balance of payment and foreign reserves of Jor- of specific sectors. dan will be significant. Box E.1 describes in more details the performance and prospects in most of The choice of the targeted sectors was based on two these sectors. key factors. First was Jordan’s comparative advan- tage proxied by the skill-intensity of the sectors in It is noteworthy that not all the skill-intensive sec- the country. Figure 20 shows that ICT, the phar- tors display high levels of labor productivity. As maceutical sector, business services, financial ser- shown in Figure 21, while ICT, banking, pharma- vices, education services and health services present ceutical and, to a lesser degree business services are the highest levels of skill-intensity in the economy. clearly above the country’s average level of labor The share of workers with tertiary education in total productivity, education and health services display employment varies between 45 percent in pharma- a low level of productivity (despite their high skill ceutical industries and 82 percent in education ser- content). This reflects the large presence of the vices. It is hoped that growth in the skill-intensive public sector as a provider of these services and the sectors will contribute to enhancing the employment of skilled individuals which, all else being equal, should reduce overall unemployment. In 2010, these 20 According to Jordan’s recent input-output table, the size six sectors collectively represented about 20 percent of each of these sectors in terms of their share in total of Jordan’s GDP.20 value-added is the following: Education: 6.1  percent, Information and communication technology (ICT) ser- The second factor was the tradability status and vices: 5.4 percent, Financial services: 4.7 percent, Health services: 2.3  percent, Business services: 2.1  percent and the potential for growth through exports. The Pharmaceuticals: 1 percent. ICT services are composed of chosen strategic sectors have all seen rapid growth post and telecom: 5.1 percent and information and com- in the past decade (8 percent on average in 2000– munication technology (also called ICT-enabled services): 2008), largely driven by exports. To the extent 0.3 percent. 24 Policies for High and Sustained Growth for Job Creation Box E.1. Performance and Growth Potential of Some of Jordan’s Key Strategic Sectors The ICT sector has been growing at a fast pace in Jordan throughout the last decade, and its magnitude is estimated at around 9.5 percent of GDP (2009). The ICT sector has seen the creation of about 65 new small companies every year between 2007 and 2010 according to the business association Intaj. The Arab countries, especially the GCC (more than 30 percent of total ICT exports), alongside the USA (22 percent) have been the major destination markets for the Jordanian ICT products. Jordan can tap further into the regional market and exploit such potential as it remains a fairly small player. The access to the Saudi market is a revealing example where the Jordanian exports to Saudi Arabia are less than 1.5 percent of total IT spending in this country. Health services have grown by an average of 9.5 percent per year in the 2000’s. This reflects the valuable reputation for excellence the country’s health sector has gained and which has propelled the Kingdom to become a prime international destination for medical services. Ranked 1st in the MENA region and 5th on a global level (World Bank 2008), the sector shows promising potentials for growth in the future. According to the private hospital association, 234,000 patients (both in and out patients) from 102 countries were treated in Jordanian private hospitals, medical centers and private clinic in 2010. These constituted around 23 percent of total patients treated in the Kingdom. The sector generated US$1.2 billion dollars in revenues in 2010 (4.5 percent of GDP). A growing number of foreign patients visit Jordan each year for medical treatment, making this service one of the nation’s leading sources of income from foreign exchange. The average visitor to Jordan for medical treatment spends US$5,500 per stay, which compares with the $515 spent by a conventional tourist. Patients also usually arrive with family members and often extend their stay and expenditure through additional tourism and leisure activities. The majority of foreign patients come from the traditional neighboring markets, such as Yemen and Libya. The pharmaceutical sector grew by 5–6 percent annually in the 2000’s. The Pharmaceutical industry in Jordan is a pioneer exporting sector due to its high quality and excellent reputation. The sector exports its products to more than 60 countries thanks to its high quality, excellent reputation, and its affordable price. About 81 percent of production is exported to foreign markets, 90 percent of which to other Arab countries, mainly Saudi Arabia and Algeria. Jordanian pharmaceutical companies have joint ventures and subsidiaries in eight Arab and foreign countries. The pharmaceutical companies are primarily engaged in the production of branded generics ranging from many dosage forms such as solids, semi-solids, liquids, aerosols as well as producing various under licensed products for multi-national companies. Close to 90 percent of the total revenues is derived from branded generics, whereas under licensed products contribute a majority of the revenues of the remaining revenues. Education services. Jordan’s higher education setup is large and diverse, involves both public and private provision of education services, and has a few pockets of excellence. The number of international students attending Jordanian universities and colleges has risen by nearly 9 percent each year over the ten years to 2003, reaching a total of 19,669 students in 2004 (update). Foreign students spend an average of $13,000 per year, including tuition, over their nine month stay in Jordan. Between US$500 and $1,100 per month is spent on living expenses. 75 percent of Jordan’s foreign students are from the Arab World, primarily Palestine, Kuwait, Oman, Syria and Saudi Arabia; If the growth of this sector reaches an average of 10.5 percent, the result will be about 100,000 international students studying in Jordan by the year 2020, contributing around JD 929 million at current prices. An examination of the World’s Top 500 Universities in 2003 reveals that none of the World’s Top 500 universities are from Arab countries. There is therefore currently an opportunity for Jordan to emerge as an educational hub in the region. International student penetration in Jordan (one international student for every 303 residents of Jordan) is higher than the U.S. (one for every 495 residents of USA). Regionally, Jordan comes after the UAE (one for every 159 residents) and Lebanon (one for every 271 residents). Egypt comes last (one for every 6,380 residents). While Lebanon surpassed Jordan in both student penetration and economic significance, the high living costs in Lebanon and the strict regulations that countries are applying to graduates from Lebanon reduce its competitiveness. A greater threat to Jordanian university competitiveness, in attracting international students and even Jordanian and international faculty, is the UAE. Business services. The provision of architectural and engineering (AE) services is Jordan’s largest source of professional skilled services, both in terms of output and added value. About 70 percent of workers in this sector are engineers. Females make up about 30 percent of this workforce. It has close links with other productive sectors, such as construction. As a sector that is intrinsically creative and innovative, it is a key part of the country’s drive to modernize and embrace a dynamic, knowledge and skills-based economy in the 21st century. The AE services sector in Jordan has experienced steady and continuous growth at an impressive average of 20.6 percent over 2000–2008. About 80 percent of the AE services sector is dedicated to servicing the local market, and the remaining amount is exported to about 30 countries, split fairly evenly between the regional and global markets. While regional markets present large export potential, the more sizable and sophisticated markets to enter are those in the U.S. and Europe. Jordan can easily become the AE services hub of the Middle East, by emphasizing its quality and well-priced service provision and by leveraging regional, bilateral and global trade agreements, all of which will help attract FDI in this sector. Source: Jordan 2020 Vision Initiative (2007) government tendency to recruit massively in public sectors represent a very small share in total employ- schools. In fact, among the skill-intensive sectors, ment: 2.8 percent for business services, 2 percent education and health are the only ones with large for banking and other financial services, 1.3 per- levels of employment (11.8 percent and 4.3 percent cent for ICT and 0.5 percent for pharmaceutical of total employment respectively). The other four (Figure 21). Structural Reforms for Robust Growth and Job Creation 25 Figure 21. Average Level of Labor Productivity vs Skill Content – Size of bubble is employment share (parenthesis) 2010 Average Level of Labor Productivity 55 Information and Communication Technology (1.3%) Mining & Quarrying (0.8%) Other Financial 35 (0.5%) Other Manufacturing Pharmaceuticals (11.5%) Hotels (0.50%) Agriculture (2.6%) Banking (3.1%) Public Admin & Defense (1.6%) (26.8%) 15 Construction Business (5.5%) Utilities (2.8%) Health (1.7%) (4.3%) Transport Education (8.9%) Other Services Trade (6.8%) (11.8%) Skill (17.4%) Content –5 0 10 20 30 40 50 60 70 80 90 Source: Bank Staff based on Jordan Input-Output Table and DOS data. Can the New Growth Strategy Deliver that labor productivity has not improved as much. on Jobs? On the other hand, a low employment intensity of growth, on its own, may not be a bad thing. Because A priori, robust growth in the skill-intensive sec- if output growth is associated with more or less the tors should contribute to enhancing employment same units of labor, it implies that labor productiv- of skilled individuals, as argued above. However, ity has increased and in a competitive factor market, whether this growth will be enough to reduce the real wages should increase as well. In highly com- unemployment of skilled individuals depends on petitive markets, increases in productivity are often the extent to which these sectors can suck up large the only way for firms to remain competitive. pools of skilled unemployed as they grow, i.e., the elasticity of employment to growth. Employment Jordan’s aggregate employment elasticity in elasticities show how growth in economic output 2000–2009, estimated at 0.53, is less than half its and growth in employment evolve together over level in 1991–1999, when it was 1.16. In other time. Once estimated, the elasticities determine the words, while there was a 1 to 1 relationship between growth rate of value-added for any level of employ- GDP growth and employment growth in the 1990s, ment growth.21 in the last decade, a 1 percent increase in national output in the 2000s increased employment by only For policymakers and job seekers, a high elasticity 0.5 percent. This decrease in Jordan’s employment of employment is highly desirable. However, from a firm perspective, high employment elasticity im- 21 For a given labor supply growth, they can thus be used to plies that increased output is associated with a large determine the growth in value added required to impact number of additional units of labor. This may mean unemployment (see below). 26 Policies for High and Sustained Growth for Job Creation elasticity and the consequent improvement in ag- • Projection 2 (1.5x VAGR) – employment in gregate labor productivity are in line with the ex- the 6 targeted industries are projected using perience of the other MENA countries, where the 1.5 times the average annual real value added average employment elasticity fell from 1.00 in growth rate from 2003 to 2008; remaining low- 1991–1999 to 0.65 for the 2000–2009. productivity industries are projected using base- line projections (as in projection 1). The employment elasticities of growth vary greatly • Projection 3 (2x VAGR) – employment in the by sector in Jordan.22 Not surprisingly, low pro- 6 targeted industries are projected using 2 times ductivity sectors have a higher propensity to create (or double) the average annual real value added jobs when they expand than higher productivity growth rate from 2003 to 2008; remaining low- sectors. Construction and real estate stand out as productivity industries are projected using base- the most job-creating sectors of the economy. The line projections (as in projection 1). other sectors with high employment elasticity are • Projection 4 (3x VAGR) – employment in 6 public administration, education, and transport. targeted industries are projected using 3 times On the other hand, sectors such as pharmaceuti- (or triple) the average annual real value added cal (chemicals), information and communication growth rate from 2003 to 2008; remaining low- technologies, financial intermediation, health (in- productivity industries are projected using base- cluding health tourism) all have low elasticity of line projections (as in projection 1). employment to output growth. Because these sec- tors have a lower propensity to create jobs when Figure 23 shows how the trend in labor force growth they expand, it is imperative that they experience compares with employment growth under each of robust growth to mop up the available skilled labor the above scenario. Clearly, if Jordan replicates the in the market. same growth performance as in 2003–2008, unem- ployment will remain significant by 2016: 350,000 Using the sectoral employment elasticities (Chap- individuals or 13.7 percent of the labor force, would ter 3, Volume 1), it is possible to project employ- remain unemployed in 2016. If the six targeted sec- ment growth resulting from different assumptions tors grow at 1.5 times the rate they did in 2003–2008 of sectoral value-added growth. Our baseline sce- while the rest of the economy performs as it did nario is the replication of the growth scenario of in the benchmark period, 290,000 individuals or 2003–2008. In other words, in the baseline scenar- 11.5 percent of the labor force would remain unem- io, we assume that all 19 industries that constitute ployed by 2016 (from about 13 percent today). If Jordan’s GDP grow at the same rate as they did in the 6 targeted sectors grow twice as fast as in the base 2003–2008. The subsequent scenarios single out the six targeted sectors and assume that they grow 22 Jordan’s input-output table (IO), highly disaggregated (89 faster than the rest of the economy. In 2000–2009, sub-sectors) was constructed for 2010 only. Unfortunately, banking intermediation registered an average annual for the estimation of the employment elasticities, which re- quired multiple years sectoral data (we used the years 1992– growth rate of 16.7 percent, ICT 9.5 percent, health 2009), we could not use the IO. We instead used more ag- 9.5 percent, chemicals (which includes pharmaceu- gregated sectors as defined by DOS. For instance, we had to ticals) 5.5 percent, education 3.5 percent and busi- proxy the employment elasticity for pharmaceutical by us- ness services 1.4 percent. ing the sector “chemicals� (which includes pharmaceuticals but also other sub-sectors). Similarly, “Banking� could not The scenarios are as follows: be singled out, thus the broader category “finance� is used. Finally, as elaborated in Chapter 3, the employment elastic- ity for ICT, which was negative in 2005–2008 (because of • Projection 1 (baseline) – Employment in all 19 the restructuration of the sector) was assumed to be similar industries are projected using the average annu- to the national average (0.5) since it is unlikely to be nega- al value-added growth rates from 2003 to 2008. tive in the projection years. Structural Reforms for Robust Growth and Job Creation 27 Figure 22. Employment Growth under Figure 23. Jordanian Employment – Different Sector Growth Scenarios Alternative Projections (2009–2020) (2009–2016) Millions of Persons 3.00 2.942.91 Millions of Persons 2.55 2.50 2.52 2.81 2.43 2.71 2.61 2.34 2.32 2.50 2.52 2.30 2.26 2.43 2.23 2.17 2.17 2.34 2.34 2.26 2.10 2.10 2.17 2.16 2.02 2.10 1.95 2.00 2.02 2.04 1.90 1.88 1.95 1.88 1.80 1.80 1.72 1.72 1.70 1.66 1.66 1.50 1.50 1.40 1.22 1.30 1.00 1.10 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Labor Force Projection 2 (1.5x VAGR) Labor Force Projection Projection 3 (2x VAGR) Labor Force Projection 2 (1.5x VAGR) Jordanian Employment Projection 4 (3x VAGR) Labor Force Projection Projection 3 (2x VAGR) Projection 4 (3x VAGR) Projection 1 (Baseline) Total Employment Projection 1 (Baseline) Assuming that Jordan’s targeted sectors can grow period, 200,000 unemployed will remain (7.9 per- even 1.5 times as much as they did in the past should cent of the labor force). Jordan’s unemployment gap not be taken lightly. Indeed, international competi- would only be closed by 2016 under the highly unre- tion is stiff and a large number of dynamic coun- alistic scenario in which the 6 targeted sectors grow 3 tries are putting together reforms to help the same times as much as they did in 2003–2008. sectors grow. Thus, focusing solely on promoting the Government’s targeted sectors (or “knowledge- Figure 23 replicates the same growth scenarios as intensive sectors�) is unlikely to solve Jordan’s un- above but focuses on employment growth of Jorda- employment problem. Policymakers should not ne- nians workers assuming the foreign labor content of glect addressing specific issues in “traditional, labor the 19 sectors remain constant. It is worth noting intensive� sectors where Jordan has a comparative that under this assumption, even if the six targeted advantage (e.g., tourism, retail trade and textiles and sectors hardly employ non-Jordanians, the largest closing). For instance, over the last decade, labor- number of jobs will still be created in the low-skill, intensive sectors absorbed a large number of jobs, labor-intensive sectors which employ a large num- ber of foreign workers. Figure 24 shows that only 23 It is difficult to predict the changes in the employment by 2020 would the Jordanian employment gap be growth of Jordanians because statistics on migration are of poor quality and a large number of Jordanians prefer to closed under the (unrealistic scenario 4). It appears queue for government jobs and may not be captured as job clearly that reducing unemployment for Jordanians seekers by labor surveys. The simulations in Figure 24 are is a much bigger task than reducing total unemploy- just meant to provide an idea of how the labor market for ment in Jordan.23 Jordanian could look like under specific assumptions. 28 Policies for High and Sustained Growth for Job Creation but experienced stagnant or negative growth in real Nation, or MFN, tariff rates) from 23.8 percent in wages. Without creating distortions in the market, 2000 to 10.2 percent in 2011. In addition, Jordan specific reforms to improve working conditions may signed trade agreements with a number of bilateral help attract educated and skilled Jordanians in these and regional trade agreement, including the US sectors (beside, the observance of minimum work- (JUS FTA in 2001), EU (Euro-Med Agreement ing standards is desirable as a human right). in 2002) and other European countries (EFTA in 2001), Singapore (2006), the Greater Arab region Furthermore, although the growth strategy’s focus (GAFTA in 1998), as well as Agadir (2006) and, on tradable sectors where Jordan has comparative most recently, with Canada (2008). advantage is sound, there are some “implementa- tion� risks worth noting. In many countries, failures In parallel, Jordan stepped up its efforts to promote have come from a lack of a level playing field among exports through specific programs managed by the the firms within the targeted sectors, state capture Jordan Enterprise Development Corporation (JED- and “rent-seeking behavior� on the part of potential CO). Finally, major improvements were achieved in beneficiaries of government support and the absence key backbone services such as port services, telecom- of an accountability framework to reward success munications and transport through regulatory re- and sanction failure (example by rapidly stopping forms and privatization of state-owned enterprises. government support). Furthermore, it should be These reforms have contributed to the rise in total emphasized that just as some sector-specific inter- factor productivity in Jordan since the early 2000’s. ventions (e.g., supporting the establishment of ven- Annual growth in trade nearly doubled to 16.1 per- ture capital funds for investors in the ICT sector) cent in the years 2000’s, against 9.4 percent between can be an appropriate response to limited business 1990 and 1999. plans but no collateral, general investment climate reforms that promote entry and competition are This impressive achievement notwithstanding, as crucial to the permanent process of discovery of shown in Chapter 5, Jordan can do better. Today, new profitable activities in all sectors. Thus the con- the competitiveness of the economy is driven by tinuation of cross-sectoral policy reforms is crucial. some key sectors namely textiles, pharmaceutical, Implementation “risks� can however be mitigated chemical, phosphates and potash. While services by strengthening public-private partnerships. On sectors make up 70 percent of GDP, the promising that front, the Government’s recent initiative, which exporters within services, ICT, medical tourism, and consists of partnering with the private sector within professional services are too small to have macroeco- a strategic competitiveness framework that identifies nomic effects. Furthermore, export survival in new and attempts to overcome specific market failures markets is among the lowest in the region. Jordan’s and public good shortages, is sensible.24 performance for new products and new markets (“extensive margin�) is poor. The country tends to do well when established exporters export existing Trade Integration Reforms products to traditional markets (“intensive margin�). Jordan stands out as one of the most open econo- The evaluation of the impact of Jordan’s numer- mies in the region thanks to decisive market and ous trade agreements and export promotion pro- trade integration reforms implemented in the early 2000’s. The Government has, over the past fifteen 24 This sector-by-sector competitiveness compact whereby the years, made great strides in liberalizing its trade private sector identifies the key obstacles to their competi- and investment environment. Upon accession to tiveness and works with the Government to remove them is the WTO in 2000, Jordan substantially reduced its supported by a Technical Assistance Program of the World simple average tariff rate (based on Most Favored Bank and IFC. Structural Reforms for Robust Growth and Job Creation 29 grams conducted in this report shows a mixed per- • Export promotion activities (JEPA) have a stron- formance. Regarding trade agreements, while the ger impact at the “intensive margin� (export of Jordan-US FTA has generated a large trade creation existing products to traditional markets) than effect without trade diversion, the implementation at the “extensive margin� (“export of new prod- of the regional agreements (GAFTA and AGADIR) ucts and exports to new markets�) for Jordanian has led to some level of trade diversion without firms. Future programs should take this finding much trade creation. In other words, Jordan has into account. After all, export promotion cannot hardly increased its export to these partners as a re- be expected to transform “ducks into swans�. sult of these agreements. At the same time, the in- • Export promotion (JEPA) has a stronger impact crease in duty-free imports from these countries has in terms of geographical diversification than in “replaced� imports from non-preferential partners terms of product diversification. Future orien- that normally pay customs duties at entry. The net tation of the program should strive to identify welfare impact is negative. Vis-à-vis the EU, Jordan specific markets (e.g., markets with which Jordan has expanded its exports as the result of the FTA has signed an FTA and where penetration is shal- (trade creation), but to a very small extent. Jordan low, e.g., EU and Canada) and assist established has not yet fully reaped the potential benefits of its firms to penetrate them durably. trade agreement with the Europe. • For the JUMP program which primarily aims at modernizing and upgrading SMEs and is not Jordan’s trade promotion (Jordan Export Promotion directly designed for export promotion, the im- Activities, JEPA) and industrial upgrading programs pact on the intensive margin of export growth (Jordan Upgrading and Modernization Program) is weaker and less persistent, and the impact have helped firms to increase their exports to over- on the extensive margins is verified in terms of seas markets. However, rigorous impact evaluation product diversification only. Future beneficiary shows that this impact is positive only for estab- criteria should take this into account. lished exporting firms and is short-lived. In other words, after only a few years, firms that have ben- efitted from the program perform as well as non- Business Environment Reforms beneficiaries, consistent with the concurrent finding that export survival of Jordanian firms in foreign Jordan has made important strides in improving markets is very limited (Figure 24). Some key policy regulations on businesses over the last decade. In- implications follow: ternational benchmarking shows that one cannot Figure 24. Additional exports for typical JEPA beneficiary and JUMP beneficiary 6000 800 Average Export value per rm (KTD) Average Export value per rm (KTD) 5000 700 600 4000 500 3000 400 2000 300 200 1000 100 0 0 2004 2005 2006 2007 2008 2009 2010 2004 2005 2006 2007 2008 2009 2010 No EPA EPA No JUMP JUMP 30 Policies for High and Sustained Growth for Job Creation attribute the economy’s lack of dynamism and cre- obstacles to a better business climate. Instead, firms ative destruction (new, innovative firms replacing frequently complain that the government does not old ones) to doing business type of indicators focus- consult the private sector appropriately when it issues ing on the legal business environment (Chapter 7). or amends legislations, e.g., changes in tariffs (see US- Although there are a few areas where legal reforms AID Fiscal Reform Project 2011). are needed right away, Jordan does more or less as well as comparators in more dynamic middle income countries or even OECD countries across most di- Industrial Policies mensions of the DB indicators. That is, the problem is not necessarily with the laws and regulations. Governments around the world play an active role to foster foreign technology transfers by promoting the The problem appears to be with how these laws capacity and providing incentives for domestic firms and regulations are implemented and enforced. The to engage in “new� (foreign) technologies, processes, business environment is not the same for everyone. or products through different industrial policy in- Rules and regulations are not applied equally to all struments in most emerging economies. Emerging firms. Hence many firms and potential investors East Asian or Eastern European economies man- perceive the implementation of business regulations aged to achieve high sustained growth through a as uncertain and unequal. This is an important de- continuous process of successful foreign technol- terrent to investment that should be addressed. The ogy transfers in specific industries. The transfer of cost of uneven applications of business regulations foreign technologies and their adaptation to local has been found to have a negative impact on com- market and production conditions did not happen petition, innovation and employment (Chapter 7). automatically since they are associated with market failures and externalities. Instead, governments pro- Policymakers must acknowledge and account for the vided incentives for domestic firms to diversify into fact that legal regulations are not implemented con- new products and supported their access and capaci- sistently and might potentially even be used to dis- ties to adopt existing superior foreign technologies criminate or benefit certain groups of firms. Hence, from foreign investors or exporters to local market it is important to focus on institutional changes and production conditions. that minimize discretion in policy implementation as well as official’s latent incentives to discriminate For instance, China provided good infrastructure between firms. The institutional reforms outlined services, implemented straightforward regulations, above focused on improving the accountability of and frequently granted tax incentives for foreign the public administration are likely to help consis- firms in special economic zones for selected indus- tent implementation of rules and regulations as well. tries in exchange for technology transfers through joint production networks or joint ventures. Domes- In addition, strengthening the dialogue between the tic firms and suppliers operating in these industries government and the private sector would be equally received government support to be able to keep up important. The dialogue between the government with foreign investors maximizing their ability to and businesses about new regulations, industrial poli- adopt foreign technologies. That is, China’s openness cies, incentive schemes, etc. should be frequent and to foreign investors was driven by a clear develop- systematic. Permanent institutions such the economic ment strategy: to kick-start or upgrade domestic pro- and social councils can be a useful platform. The Gov- ducers. Jordan seems to have similar ambitions, but ernment should engage in constructive dialogue with has not put in place a consistent strategy to get there. specialized business associations of the ICT (Intaj) or the pharmaceutical sector as well as the Chambers of The role of industrial policies in Jordan is not clear- Commerce and Industry to pragmatically remove the cut; instead, several ministries and institutions Structural Reforms for Robust Growth and Job Creation 31 have overlapping responsibilities with respect to gram focuses on business incubation, training, or fragmented investment promotion and industrial technology upgrading for selected SMEs. Report- policy strategies (Chapter 6). There exist different edly, the MoIT demanded 115 million JD over five sector-specific incentive programs with varying ob- years for its implementation but only 14 million jectives. The Ministry of Industry and Trade (MoIT) JD have been allocated. The program is exclusively developed an industrial policy strategy focusing on funded by the government as the private sector SMEs. JEDCO is generally responsible for its im- does not contribute. plementation. The Jordan Investment Board (JIB) has the mandate to improve the business environ- The investment law (approved by the Council of ment and provide (tax) incentives to investors.25 The Ministers in June 2011) includes provisions in the Development and Free Zones Commission (DFZC) right direction. It streamlines the number of tax ex- developed a comprehensive strategy for four re- emptions. Article 4 of the new law stipulates that gional development zones, each of which aims to the Council of Ministers can grant any privileges promote specific industries by granting substantial to economic activities that create jobs for the Jor- tax exemptions and providing other incentives. The danians, increase local added value, or contribute Central Bank of Jordan implements a credit support to R&D, regional development, and the transfer of program for SMEs, .e.g., reducing reserve require- technology. Importantly, the privileges have to be ments for private banks equivalent to their total published in an official gazette. SME loans. Finally, the Council of Ministers can grant additional tax incentives for selected firms or However, the law refrains from the implementation industries. of monitoring and evaluation systems to benchmark the performance of benefitting firms. The account- The industrial policy program of the MoIT as- ability of industrial policymakers to the wider public sists SMEs in upgrading their technologies and or media can be improved by (i) measuring the per- knowledge base; however, it refrains from target- formance of public agencies and making the results ing specific industries or groups of firms with the publicly available and (ii) monitoring and evaluat- highest potential to benefit and does not define ing the performance of firms that benefit from pub- clear-cut conditions linking government support lic interventions (e.g., tax exemptions). Further- to SMEs’ performance. The focus of the industrial more, apparently, agreements are negotiated with policy program is consistent with East Asian best potential (foreign) investors or business associations practices promoting the adoption of new (foreign) of individual industries balancing the provision of technologies. Chances of success could be further incentives with the potential for job creation, local maximized by explicitly targeting specific indus- added value, or technology transfers.26 This prac- tries or other characteristics for groups of firms tice implies that the extent of incentives might vary with the largest potential to gain competitiveness from technology transfers. More importantly, ap- 25 The new Investment Law (drafted in 2011) restricts the propriate monitoring and evaluation systems or discretionary freedom to grant ad hoc tax exemptions clear-cut rules benchmarking the performance of somewhat (see below). benefitting firms are very limited. Donor funded programs are typically better designed including 26 For instance, the Ministry of Labor recently signed a co- performance benchmarking of benefitting firms. operation agreement with the Jordan Garments, Accesso- However, these programs are often small and are ries & Textiles Exporters’ Association ( JGATE), seeking to increase the share of Jordanians working in the sector not sustainable once the donor support is with- (25 percent). Reportedly, 16 association company members drawn. Perhaps because of the large number of in- committed to provide about 1,800 job opportunities while stitutions involved, the industrial policy program the ministry guarantees JD 45 monthly for each recruited developed by the MoIT is underfunded. The pro- worker for the first twelve months. 32 Policies for High and Sustained Growth for Job Creation with the negotiation skills or influence of individual broadening, re-calibrating and seriously increasing firms, business associations, individual government the potency of its innovation policy—as opposed to decision makers and officials implementing the just incrementally tweaking what is there. The new agreements. comprehensive innovation policy should address the content, scope and process problems of the cur- rent system. The World Bank and Korea Develop- Innovation Policies and Strategy ment Institute are supporting the development of this process. Innovation governance stream-lining, The following statistics illustrate the weaknesses of prioritization and financial support for innovation Jordan innovation system: activities are the key areas to be focused on: • Only 24 percent of Jordanian firms offer formal • Establish innovation leadership. To increase the training programs for their employees, includ- visibility and priority status of innovation on the ing female employees, to advance on the orga- government’s agenda, the national innovation nizational ladder; process needs a central anchor, long-term lead- • Only about 13 percent of service sector compa- ership which outlasts changing governments; nies and 19 percent of manufacturing compa- there is a need to streamline the policy with the nies use technology transfers from other firms National Agenda, to ensure sustainability; or parent firms as a source of support for inno- • Support of sectoral priorities as well as support vation activities; cross-sectoral reforms. Cross-cutting actions • There is virtually no seed, angel and VC fund- will involve, for example, a focus on competi- ing for private firms; tiveness enhancing policies. Part of this process • The government and private sector agencies for in Jordan has already involved breaking down innovation activities have underdeveloped ca- monopolies in productive sectors to enhance pacities, monitoring mechanisms and informa- competitiveness (e.g., ICT sector). These ac- tion for them to effective support and imple- tions may also involve retraining and further ment innovation activities. skills development, by the public and the pri- vate sectors; There is a need for a broader, more private sector- • Develop specific financing mechanisms for in- focused national innovation strategy instead of the novation activities across sectors. For example earlier near-exclusive focalization on science and a reliable credit guarantee system to support technology. There is a large number of innovation Jordanian start-ups and SMEs is needed, so related initiatives, institutions and policies in Jor- is encouraging seed, angel and VC funding. dan, but they are not always effective and are sel- Initiatives such as OASIS 500 can also greatly dom strategically aligned with the challenges the help transform new business ideas into viable country is now facing. Jordan needs to consider businesses.