Growth History of Jordan Part I: Building the Foundations of the Economy (1948-1966)

The State of Jordan emerged after the 1948 Arab – Israeli war. Jordan resulted from the unification of the Emirate of Trans-Jordan with the Palestinian territories in the West Bank and East Jerusalem. The 1948 war had two main consequences on the economy. First, the rapid increase in population stimulated demand for basic utilities, goods and services. Second, the foundations of economy were built through the increased intervention of the state.

The massive inflow of Palestinians after the 1948 war brought dynamism to the economy. According to estimates, Jordan’s population tripled from 500,000 to 1.5 million in 1948-50[1]. The Palestinians brought with them their savings, together with their relatively higher education and entrepreneurial spirits[2]. This influx of financial and human capital increased demand for housing, goods and services, stimulating production. At the same time, the Palestinian entrepreneurs added dynamism to the private sector. They joined the Jordanian commercial elite in setting-up small and medium enterprises, mainly concentrated in the Amman area[3].

The government built the foundations of the economy through economic planning. Import Substitution Industrialization (ISI) and economic planning inspired Jordan’s economic activity at that time. A Development Board was set up to oversee public investments under five-year plans. The first plan was adopted in 1962-7. The country’s core infrastructure of basic public utilities (i.e. water, energy, transport, and telecommunications) and public services (education and health) were built. The industrial apparatus was established according to a two-tier structure. The first tier included Jordan’s ‘Big Five’ State-Owned-Enterprises (SOEs): the Jordan Phosphate Mines Company, the Jordan Fertilizer Industries Company, the Arab Potash Company, the Jordan Petroleum Refinery Company, and the Jordan Cement Factories Company. The second tier consisted of Small and Medium-Sized enterprises (SMEs) that produced consumer products for the domestic market. The government protected the domestic industry through high tariffs and import embargos, as well as market entry restrictions and licensing requirements.[4]

During the 1950s and 1960s, Jordan’s GDP grew by 8-9%[5]. Agriculture played a major role in the economy in terms of value added. However, most of the growth was achieved in construction and infrastructure, as a result of the refugee inflow. On the other hand, manufacturing lagged far behind despite government’s efforts. The domestic industry proved unable to satisfy consumer demand. Therefore, demand for imports of goods and services soared. This dynamic, coupled with the lack of export orientation of the economy, created a trade deficit problem that still characterizes Jordan. In 1972, exports of goods and services represented 34% of imports[6]. Nevertheless, Jordan was able to cope with the negative trade balance thanks to the inflow of remittances from Jordanians working abroad, as well as to official development assistance (ODA) from the Arab oil rich countries strengthening the current account

 Read Also:

• Growth History of Jordan Part VI: the Second Phase of Struggling Economic Reforms (1992-1999)
• Growth History of Jordan Part V: Economic Reforms Clash Against the Gulf War (1989-1991)
• Growth History of Jordan Part IV: Facing Reality with the End of Free Lunches (1985-1989)
• Growth History of Jordan Part III: Sustaining Growth at the Expenses of Public Imbalances (1974-1984)
• Growth History of Jordan Part II: the First Growth Interlude (1967-1973)

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[1] Chatelard, Geraldine. “Jordan: A Refugee Heaven”. Migration Policy Institute. August 2010.

[2] Kanaan, Taher H. and Kardoosh, Marwan A. “The story of Economic Growth in Jordan: 1950-2000”. Amman: October 2002 (unpublished).

[3] Piro, Timothy J. “The Political Economy of Market Reform in Jordan” , ”The State and the Economy in Historical Perspective”.  Rowman & Littlefield Publishers, Inc. 1998.

[4] Ibidem. Kanaan, op. cit. The Library of Congress. “Jordan Country Profile”. September 2006.

[5] Kanaan, op. cit.

[6] Alissa, Sufyan. “Rethinking Economic Reform in Jordan: Confronting Socioeconomic Realities”. Carnegie Endowment. July 31, 2007

Private Sector Protesting in Rome for Unfavorable Business Environment in Italy. Are They Right?

Two days ago, for the first time in recent history, or at least since I was born, over 60 thousand representatives from the Italian private sector went on the streets in Rome to protest. Ironically, on the same day, Matteo Renzi was given by President Giorgio Napolitano the task to form a new government. The protest was organized by Rete Impresa, an umbrella association embracing firms of all sizes and sectors. The demands of the protesters were lower taxes, less bureaucracy, and more access to credit. Are Italian firms right to protest? What can Italy’s government do to support the private sector?

In this post I will examine Italy’s business environment digging into the key obstacles to enterprise growth using international measures of doing business.

Italy’s enterprise ecosystem compared to the EU

SMEs are the bulk of Italian economy. Out of 3.7 million enterprises* active in Italy, 99.9% are SMEs versus 80% of EU’s average. Micro enterprises (with less than 10 employees) account for 94.4% of the total, versus 28.7% of EU average.  SMEs provide 80% of jobs in Italy against 66.5% in the EU. They produce 68% of Italy’s enterprise value added versus 57.6% in the EU. On the other hand, large enterprises (LEs) account for only 0.1% of all firms, but provide 20% of jobs and 32% of value added versus 0.2%, 33.5% and 42.4% on average in the EU.

Contrarily to what most policymakers say, Italy is not unique in the EU for its SME-dominated private sector. In EU’s largest economy, Germany, 99.5% of firms are SMEs with 81% being micro enterprises. SMEs in Germany provide 62% of jobs and account for 53.8% of value added. In France, EU’s second largest economy, SMEs represent 99.8% of all firms, provide 62.6% of all jobs and produce 58.5% of value added.

Italy’s SMEs compared to Germany’s during the crisis

Among all enterprises in Italy, SMEs were the most hit by the crisis, both in terms of value added and employment. Between 2008 and 2012, the value added by SMEs declined by 10% and the number of employees by 5%. On the other hand, value added by LEs has returned to the levels before the crisis and employment fell only slightly. This shows that LEs handled the crisis much better than SMEs.

On the other hand, in Germany SMEs outperformed LEs during the crisis. SMEs created more jobs, added more value and grew in numbers compared to LEs. Since 2008, the number of SMEs in Germany increased by 3.7% per year. The number of jobs created by SMEs increased by 4.1% annually and SME value aded grew by 2% per year. For all the figures, SMEs outperformed LEs in Germany.

What international measures of business environment say about the obstacles to Doing Business for SMEs in Italy

Looking at a few international measures of business environment allows to shed some light.

As I have previously written, Italy performs pretty badly in Ease of Doing Business compared to other EU economies, as measured by the World Bank Group. What makes Doing Business particularly relevant to Italy is the focus of the report on SMEs. Out of 189 economies, Italy ranks 65th. This means that there are 124 countries in the world were the business regulatory framework makes it easier to start, operate and close a business. Germany, on the other hand, ranks 21st. The World Economic Forum’s burden of government regulations index confirms the Doing Business’s story. The top three constraints posed by the business regulatory framework to SMEs in Italy, as measured by Doing Business, are paying taxes, dealing with construction permits and getting credit. The Doing Business explains part of the story, telling us that in Italy, compared to most of the rest of the world, (including Germany), SMEs face obstacles posed by the business regulation throughout the entire life-cycle.

The EU’s Small Business Act (SBA) performance indicators complement the Doing Business covering other areas besides business regulation that influence private sector activity. SBA shows that Italy performs the worst in access to finance, state aid and public procurement.  The time it takes to get credit in Italy is one of the longest in Europe with 117 days versus 52 on average in the EU. In addition, 47% of enterprises in Italy indicated a deterioration in the willingness of banks to provide a loan against 27% in the EU. Italy’s legal rights strengths index is 3 versus EU’s 7. Furthermore, alternative forms of investment capital, such as venture capital, are almost null. Finally, Italy’s government performance in providing state aid and procurement has been deteriorating. It takes 90 days on average for a firm to get paid from public authorities against an EU average of 28 days.

Italian firms are subject to the highest tax rates in the EU. According to the World Bank, the total tax rate paid by Italian firms is 65.8% versus 49.4% in Germany and 41.1% of the EU average.

Key policy implications for SME development in Italy

Therefore, international measures of business environment seem to support Italian private sector’s demands. The recipe that comes from the analysis is:

• Lower business taxation rates;
• Higher willingness to provide credit to firms, lower times to give loans, and alternative ways to provide credit (i.e. venture capital investments, angel investors, crowd-funding);
• More timely payments for state aid and public procurement; and
• Lower business regulatory burden, particularly on paying taxes, dealing with construction permits and accessing credit.

Some other things to keep in mind

Aggregate data on SMEs, though, hide a more intricate story.  Italian SMEs during the crisis performed with two speeds. Micro and small enterprises whose production was oriented to the domestic market were the ones to ‘sink’ during the crisis. On the other hand, medium sized-firms that were innovative and whose production was export-oriented were able to ‘swim’ during the crisis.

Food for thought for next posts is looking more closely into what made some firms perform better than others in Italy during the crisis. It would be interesting to look at those firms that were able to achieve the highest growth in those years, the so called ‘gazelles’, to understand how they were able to circumvent the hurdles of Italy’s unfavorable business environment.

*This figure excludes agriculture, forestry and fisheries, as well as health and education.

My comment to Enrico Letta’s article: “A Future Made in Europe”

For too long EU policymakers have thought that a common trade and monetary policy could be enough to overcome the crisis letting fiscal and industrial policies at the discretion of member states. With increasing emerging market competition and other developed countries starting to grow again (US above all), the only way the EU can not only resume, but sustain growth is through a coordinated industrial policy at the EU level. This does not entail a revival of socialist style state interventionism, but a coordinated effort to create an enabling business environment for the private sector, above all advanced manufacturing, to grow, innovate and be productive, being the EU a leading export-manufacturing player in the global economy.

Mr. Letta highlights several important points. The differences in input prices and skills among EU’s economies can be levered to create a EU level value chain. Energy efficiency is key to lower energy costs to firms. Shifting from traditional sectors at low value added to innovative export-oriented high-value added sectors is key to remain competitive vis-a’-vis emerging economies. Access to finance is indeed a key business constraint, particularly for SMEs. I would add the large differentials in fiscal pressure among EU countries, the skill-mismatch between demand and supply in the labor market, the regulatory red tape for starting, operating and closing a business, the poor infrastructure increasing transportation costs.

With most EU countries under fiscal constraints, only a coordinated effort at the EU level can tackle most of these constraints. However, member states can start by pursuing (inexpensive) business regulatory reforms

Read Enrico Letta’s Article: A Future Made in Europe

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The Obstacles to Sustainable Growth in Jordan: A Long Term Perspective (1948-2013)

Jordan’s economy has built resilience undergoing severe and repeated shocks, but was never able to take off

 After the 1948 Arab-Israeli war, the inflow of Palestinians and the need to build the economy stimulated GDP growth until 1966 (8-9% on average). However, the 1967 war cost Jordan the Palestinian territories that contributed to one third of GDP. As oil prices boomed in the mid-1970s and in the early 1980s, and Jordan’s strategic relevance increased, grants and development assistance from the Gulf fueled reconstruction. For almost a decade (1976-84), Jordan embraced the highest growth in its history (11% on average). However, as the oil effect ended by the mid-1980s, growth slowed down. In 1989, a foreign debt crisis ensued, forcing Jordan to seek IMF’s assistance. Economic reforms struggled with the Gulf war and with the rentier class. In 1999, as King Abdullah II came to power, Jordan seemed ready to take-off. It accessed the WTO and signed several Free Trade Agreements. In the 2000s, GDP was growing at mid pace (6.5% on average). However, budget deficit and current account deficit persisted. Unemployment was rising. Reforms were left unfinished. In 2010, with the global crisis, GDP slowed down sharply (2.3%). In 2011-12, growth remained low (2.6-2.7%).

Structural imbalances have hindered Jordan’s long term growth 

First, Jordan has coped with external shocks by tapping into foreign payments. In particular, the dependence on Gulf countries for grants, development assistance, remittances, and FDIs, has exposed Jordan to volatility in oil business cycles and created moral hazard. Second, the accommodation of the rentier class has undermined economic reforms. In the 1990s, Jordan struggled to pursue economic reforms. Trade liberalizations only took place in the 2000s. Privatizations lost pace in 2008. Fiscal reforms have never been fully implemented. Third, the drivers of performance lacked inherent resilience. (A future post will examine the factors that have contributed to Jordan’s growth historically through growth accounting with the estimation of Jordan’s production function).

Currently, Jordan faces three major obstacles to growth:

1. Lack of creative destruction (low rates of firm entry/exit) in the business environment. Firms suffer from inadequate access to credit, unfavorable rules of the game (as showed by Doing Business indicators), and uncertainty in the enforcement of business regulations (as showed by the Enterprise Surveys).
2. Fiscal imbalances favoring the rentier class. Jordan has continued to overspend, paying high wages in the public sector, as well as subsidies and transfers. This prevents counter-cyclical fiscal policies as well as investments.
3. Labor market inefficiencies. High wage differentials between the public and the private sector have generated queuing for public employment. This was exacerbated by generous support from government and families, as well as by skills’ mismatches.

The most pressing reforms that Jordan’s economy needs are:

• Being size-blind. Removing obstacles to firm’s entry, exit, and growth, rather than protecting firms based on their size.
• Improving access to credit, by: a) lowering the barriers to entry for foreign banks; b) allowing mobile assets as collaterals; and c) establishing credit bureau systems.
• Reducing uncertainty in the enforcement of business regulations, ensuring equality among firms of different size and in different locations
• Reviewing hiring and compensation in the public sector, by: a) aligning public salaries with the private sector; and b) holding national examinations. 
• Improving the quality of education. Vocational trainings are needed especially in rural areas.
• Removing subsidies and tax incentives (i.e. tax exemptions) that waste government resources and distort competition. 

Note: This is an abstract from a larger work that I discussed as part of my M.A. graduation thesis at Johns Hopkins SAIS.

Acknowledgements: I would like to thank  Dr.  Marwan Muasher  and Dr. Michael Klein for the invaluable advise with this research work.

Sources: World Development Indicators, Doing Business, World Bank Enterprise Surveys,