6 Adjustment and Development: The Case of Jordan

Saíd El-Naggar
Published Date:
September 1987
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Jawad Anani

This is an analytical study of the economic adjustment policies that have been adopted by Jordan with a view to achieving certain economic and social objectives, and an evaluation of these policies in terms of their success in attaining these targets. This paper therefore includes a general review of the adjustment policies and their impact on inflation, export capacity, the cost of production, income distribution, and political and social stability. It then presents an analysis of the various price policies that have been applied and their social and political consequences. Last but not least, the paper deals with savings and investment and related incentives in the Hashemite Kingdom of Jordan.


Jordan is poor in natural resources. The most important available natural resources are phosphates, potash, agricultural land in the Jordan and Dead Sea Valley, and some other mineral deposits such as feldspar and glass sand. Large oil shale formations have recently been discovered in the southern section of the country and exploration for petroleum is under way.

Development efforts have accordingly concentrated on the utilization of available resources. The largest production projects have been in the area of exploitation of available natural resources. These projects have involved, for example, the Phosphates Company, the Chemical Fertilizers Company, the Arab Potash Company, the cement works, and the Jordan Valley Project. There are also a good number of large-scale industries that provide for the country’s essential needs, for example, the Jordanian oil refinery, iron, leather, clothing, food, and plastics industries. Making use of its skilled human resources, Jordan has also been successful in developing some basic sectors such as banking, construction, transport, and transit trade. However, it is education that has made the most effective contribution to the country’s development. The best indicator of its importance is the amount of remittances from Jordanian nationals working abroad which was double the country’s income from commodity exports in 1981–85.

Despite the scarcity of natural resources, Jordan was able to achieve relatively high rates of growth. During the period of 1952–66, gross domestic product (GDP) grew at a rate of 6.5 percent in real terms. Although growth declined to zero from 1969 to 1971, the overall rate for the period of 1967–72 was 4.6 percent. The 1973—76 period witnessed, for the first time, the full and uninterrupted implementation of a plan, the First Three-Year Development Plan, which achieved a growth rate of 5.9 percent. But it was the period of 1976–80 that was really the main period of prosperity and construction, with a growth rate of 12.1 percent, slightly higher than projected in its corresponding Five-Year Plan. During the Second Five-Year Plan (1980–86), growth was only 4.2 percent, a rate that lagged behind target rates. Jordan has now embarked on another Five-Year Plan, for 1986–90, and it seems that its modest GDP growth rate target of 5.1 percent at factor cost will not be easy to meet, judging by the results in 1986, estimated at 1 percent at best.

The brief conclusion of this survey is that Jordan has been able to achieve steady and sustained GDP growth interrupted only in the short three-year period following the 1967 war and its consequences: the occupation of the West Bank, the migration of 360,000 people from the West Bank and the Gaza Strip to the East Bank, and domestic disturbances that reached a climax in 1970. Notwithstanding this steady growth, however, Jordan has had to contend continuously with adjustment issues. The following pages survey the origins of the fluctuations in Jordan’s economy, the reasons for these fluctuations, and their impact on the principal economic variables.

The First Phase (1952–66)

This phase was marked by the transformation of Jordan into a cohesive and developing state. The year 1950 witnessed the union of the West Bank—or the unoccupied part of Palestine, apart from the Gaza Strip—with the East Bank (Trans-Jordan). The merger aggravated the economic burden weighing down on the state, which was forced by the inadequacy of the productive structure to provide for the essential needs of most of the population. But the Government’s resources remained dependent, to a large extent, on the amount of external assistance from the British and U.S. Governments and emergency aid from the United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA) and the World Bank (Jordan became a member of the Bank and the IMF in 1955). External aid accounted for 58 percent of total government receipts in 1952, dropping to 36 percent in 1966. Government expenditure, which amounted to about 13.4 million dinars or 26 percent of GDP in 1952, gradually rose to 29.5 percent in 1966—a reasonable increase in a country whose military, social, and development burdens were constantly rising.

In terms of economic stability, this was a relatively quiet period. The average annual increase in prices was only 2 percent and the unemployment rate about 14 percent. The GDP was largely based on agricultural production, growing industrial output, and heavy government expenditure. The main ups and downs of the economy derived from fluctuations in rainfall and seasonal agricultural conditions and from external political developments, as in 1956 and 1957 owing to the Suez crisis and the closing of the Suez Canal for several months. By 1964, the World Bank and the United States were beginning to show growing interest in Jordan. British aid virtually ceased, leading to Jordan’s exit from the sterling area. But Jordan adhered steadily to its external reserve management policy, whereby currency in circulation was backed 100 percent or more by gold and foreign exchange reserves, and new currency was issued on a one-to-one basis against net foreign exchange income. However, the money supply in the narrow sense was increasing at an accelerating pace and outstripping GDP growth. Between 1952 and 1966 it expanded at an annual average of about 9 percent, while sight deposits rose at a lower rate. The high rate of money supply growth in relation to GDP can be attributed to the higher liquidity created in the economy by the expansion of banking. The number of commercial banks rose in that period from 9 to 13, and the number of bank branches from 13 in 1954 to 70 in 1966. Some specialized lending institutions were also established during that period, including the Agricultural Credit Corporation, the Cooperative Organization, the Municipal and Village Development Bank, the Industrial Development Bank, and the Housing Bank. But the most significant event in the banking sector was the establishment of the Central Bank of Jordan in 1964 to replace the Jordan Monetary Board, whose functions had been limited to currency issue and reserve management.

Generally speaking, the period of 1962—66 was one of relative stability: Government efforts concentrated on providing essential needs and supporting production. The private sector played an important role in the development of industry and agriculture and its efforts were responsible for the establishment of the phosphates and cement industries and the oil refinery. Rainfed and irrigation farming grew at a steady pace. The solution of the unemployment problem was left to the success of the country’s development as a whole, and the Government did not adopt any significant adjustment policies. Efforts focused on affirming Jordan’s eligibility for development. A seven-year program covering the period from 1964 to 1970 got started on schedule, but was suspended in 1967, owing to the Arab-Israeli war and the occupation of the West Bank.

The Second Phase (1967–72)

This period of great internal and external turmoil tested Jordan’s ability to steer its economy in a stormy sea of troubles. Jordan was faced in that period with the 1967 war resulting in the occupation of the West Bank, the loss of 40 percent of the country’s farming income, 80 percent of its income from tourism, 20 percent of its industrial production, and 3 percent of the total area of fertile land, and the migration within one week of about 360,000 people to the East Bank, increasing its population by one third. Following the war itself, Jordan went through a period of border fighting with Israel that culminated in the Karameh battle of March 1968. Economic and farming activity in the fertile areas of the Jordan and Dead Sea Valley and in the northern and central sections of the country came to a stop as a result. Another consequence was the suspension of the seven-year program as government efforts concentrated on meeting the essential needs of the refugees, who had come to the East Bank with no funds, resources, or jobs. Later, Jordan had to contend with civil strife that paralyzed economic and construction activity and did not end until 1971. Owing to the closing of the Suez Canal and the frontier with the Syrian Arab Republic, Jordanian exports suffered a marked decline, spurring the country to increasing reliance on the port of Aqaba, its only seaport.

This period was also marked by significant developments on the financial scene, the most important of which were the phased reimbursement of holders of balances in West Bank bank branches, without prejudice to the operations of East Bank branches; the devaluation of the pound sterling late in 1967; the collapse in 1967 of Banque Intra, including its branches on the East Bank; and last but not least, the turmoil in international money markets following termination by the United States of the conversion of dollars into gold and devaluation of the U.S. dollar against gold and other currencies in 1971.

Adjustment decisions in Jordan were not taken during that period as part of a clear-cut overall policy, but relied rather on a case-by-case approach. The Central Bank played a leading role in the management of the economy and in directing its policy toward the solution of emerging problems.

The Central Bank adopted the policy of reimbursements to West Bank depositors on the basis of a progressive plan providing for payment of one fourth of any balances totaling more than a specified minimum of 1,000 dinars. The commercial banks consequently applied themselves to collecting their entitlements in the West Bank through the staff that remained there. The success of this policy had a considerable impact in terms of enhanced confidence in the banking system and its institutions.

Following a study of the devaluation of the pound sterling in 1967, the Central Bank decided against devaluing the Jordanian dinar because sterling accounted by then for only 30 percent of Jordan’s reserves of gold and foreign exchange: the rest was in U.S. dollars, gold, and Fund assets. This decision naturally entailed a reduction in the exchange backing of the local currency equal to the share of sterling in the country’s reserves multiplied by the rate of devaluation (14 percent). The loss was, however, alleviated by the fact that payments in sterling remained unchanged, resulting in a lighter burden in terms of Jordanian dinars.

The devaluation of the dollar, however, was treated in a radically different manner. Reserves in dollars represented at the time about half of the total reserves, and most of the receipts from assistance, loans, and exports were in dollars. Thus, the decision not to devalue the Jordanian dinar vis-à-vis the U.S. dollar would have had a direct adverse effect on the export effort. Opinions on whether or not to devalue were divided in the Central Bank in 1971. Opponents of devaluation contended that it would not lead to higher exports or lower imports and would increase the money supply and create inflationary pressures in the economy. The author of this paper was one of those who opposed devaluation. But Jordan did devalue the dinar, for the first time.

Owing to inadequate commodity production and supply and to devaluation, this period marked the beginning of an inflation (over 9 percent) that spiraled with the onset of the phase of economic prosperity of 1974–80.

The 1967—72 period was thus one of economic regression, which reached its climax between 1969 and 1971. Jordan also saw the beginnings of the inflationary phase in 1972, when prices rose 12 percent for the first time in the country’s recent history. While ad hoc policies dominated at that time, Jordan emerged from the experience more confident in its ability to face crises. In 1972, when the dollar was again devalued, the opponents of currency depreciation in Jordan succeeded in averting another devaluation of the dinar.

The Third Phase (1973–75)

Although this was a relatively short period, it is extremely important to the economic analyst, for it was then that Jordan crystallized an economic policy of its own. A comprehensive development plan—the Three-Year Plan for 1973–75—was prepared for the first time and implemented. The objective of this plan was to relieve the economic recession and the crisis of confidence in the Jordanian economy among foreign investors. It was thus a plan for corrective adjustment rather than for development. The plan’s document made this explicit by defining its broader objective in terms of stimulating the economy and rebuilding confidence in it. For that purpose a modest amount of 179 million dinars was allocated. Although the rise in the cost of living was by then in double digits, the main motive of the plan was to create employment opportunities (more than 20,000 jobs) and to achieve an annual GDP growth rate of 8 percent. The plan largely succeeded in meeting its spending estimates and in realizing an average annual growth rate of 5.7 percent. But several developments beyond Jordan’s control took place during that period, leaving their mark on its economic structure.

The October 1973 war was followed by soaring oil prices and the entry of the Arab economy into the oil era. The favorable effects of this boom did not, however, make themselves felt until the following period, namely, between 1976 and 1980. The adverse effects, on the other hand, appeared immediately in the form of higher import prices, an increased money supply—owing to an overheated economy—and the emergence of a wide inflationary gap as a result of which the cost of living rose 20 percent in 1974 and 17 percent in 1975.

Jordanian trade unions were demanding higher wages following the enormous drop in the purchasing power of wages and salaries, and civilian employees and military personnel were calling for better pay. But the Government, being a large employer and finding itself faced with the task of development and rebuilding the infrastructure while addressing the consequences of occupation and correcting the imbalances that had emerged after the 1967 war, was unable to increase salaries, particularly since the employment situation required the Government to bear the burden of putting the jobless to work.

The inflationary gap was further exacerbated at the time by land speculation. This phenomenon was initially confined to Jordanian bank depositors in the country and abroad, but the development of new areas and the potential for profits from speculation encouraged borrowing from the banking system, which accommodated the demand. As a consequence, land prices skyrocketed and, in some sections of Amman, rose by as much as 1,000 percent in the span of one year. Bank credit expanded, and there was a transfer of income from savers to population groups with a high propensity to consume. Construction activity quickened as a result of the Lebanese civil war from which about 80,000 Lebanese nationals fled to Jordan in 1974 and 1975. Their arrival greatly increased demand for office space, apartments, and telephones, which were then in limited supply. Supply could not cope with demand, although imports rose steeply at an annual rate of over 20 percent, largely owing to the higher world prices of oil and imported foodstuffs.

Faced with this situation, the Government was forced to adopt a policy of income subsidies, especially in favor of the fixed-income groups, led by the civil servants. Due to higher prices of essential goods, a Ministry of Supply was instituted in 1974 with the objective of “providing essential foodstuffs in reasonable quantity and good quality and at reasonable prices.” The Ministry established a monopoly over the importation of certain essential commodities, including wheat, flour, sugar, rice, meat, poultry, and olive oil, and fixed their wholesale and retail prices. It gradually began to intervene, on grounds of consumer protection, in the pricing of many locally produced and imported goods. Moreover, approval was granted in 1975 for the establishment of a Civilian Consumer Corporation to provide civil servants with durable and nondurable consumer goods at cost price, duty free in respect of imported items. Jordan had entered the era of direct government intervention in the pricing and supply of consumer goods. The Government also attempted to control land speculation, introducing in 1973 two bills providing for a capital gains tax and an inheritance tax, but neither bill secured the votes required for passage in the Jordanian Parliament.

In view of the persistent turmoil in world exchange markets and the instability of exchange rates, the Central Bank decided in February 1975 to align the Jordanian dinar with the SDR at a parity of 388 fils per SDR, using the U.S. dollar as an intermediate currency, in keeping with the principle of a stable exchange rate for the dinar, a firm principle of economic policy in Jordan.

The Fourth Phase (1976–80)

While 1967—71 was a period of economic regression, 1976—80 was one of prosperity for the Jordanian economy. Jordan derived full benefit from the regional oil prosperity; the Government was able to complete much of the lacking infrastructure, to initiate the construction of large-scale production projects, and to bring prosperity and progress to the population in all economic activities.

The First Five-Year Plan (1976–80) was launched in 1976 with a projected expenditure of about 760 million dinars (at 1975 prices) on development projects. The plan, however, recognized two essential needs on the adjustment front: first, the control of inflationary pressures which continued to arouse the fear that they would inflict serious damage on workers and civil servants; and second, regional development, including the delivery of basic services such as water supply, electricity, housing, and manufacturing, to the rural areas. The author of this paper presented two working papers to the international “Partners in Development” conference on five-year plans held in February 1976. It was attended by a large number of experts and representatives of Arab, foreign, and international financial institutions. Under conditions of domestic and external tranquility, Jordan set out in an attempt to pursue an integrated adjustment policy in 1976. As this policy constitutes the main topic of this paper, it will perhaps be useful to take it up in some detail for purposes of subsequent analysis.

The study on adjustment policies adopted a general model that is very similar to Don Patinkin’s in his well-known book. The Jordanian market was accordingly divided into three subsidiary markets: the goods and services market; the money market, including the capital market; and the labor market. Supply and demand were analyzed to determine the extent of the surplus in each subsidiary market, the trend of each surplus in each market, and its relationship with the surpluses in the other two markets (spillover effects).

It seemed evident that foreign currency inflows, in terms of aid and loans, had reached high proportions, particularly with annual remittances from Jordanians working abroad swelling each year, reaching nearly $1 billion in 1980. Arab official aid flows also increased, especially after the Baghdad Conference, which approved over $1.2 billion in economic and military assistance to Jordan. Although some countries failed to contribute, budgetary aid from the Arab world exceeded 200 million dinars. Gold and foreign exchange reserves soared from 174.7 million dinars in 1975 to 624 million dinars by the end of 1980, and despite the growing deficit in the balance of trade, the balance of payments showed a surplus of 111 million dinars in 1980.

Such developments were bound to affect the Jordanian money supply. Thus, M1 rose from 277 million dinars in 1976 to 601 million dinars by the end of 1980, while broad money (M2) soared from 380.4 million dinars to a little over 1 billion dinars over the same period. There was also a marked increase in domestic lending: commercial bank credit to the private sector rose from 207 million dinars to 564 million dinars at an average annual growth rate of 68 percent, and credit to the Government and the municipalities from the specialized lending institutions also expanded. The growth in money supply and in the demand for credit, however, was not reflected in any significant rise in interest rates. A glance at the structure of interest rates (on deposits or loans) shows that they increased only slightly, although there were Central Bank attempts to influence credit distribution in favor of production sectors by the imposition of required ratios.

The rise in monetary aggregates was accompanied by a considerable expansion of the banking system; the number of commercial banks rose in that period to 16, with over 100 branches operating in different parts of the country. There was also a growing diversity in banking as the number of exchange houses and financial investment firms increased. The establishment of the Housing Bank, which succeeded in asserting itself in the credit market, thanks to the support it was given and to its capable management, propelled the housing and construction sector into a leading position—second only to commerce—as a consumer of credit. The Government also expanded its borrowing; the increase was made possible by the Public Debt Law. Major companies began to issue government-guaranteed corporate bonds and the number of public joint-stock companies increased, giving greater depth and breadth to the Amman financial market, which began operations in 1977. Due to the wide disparity between the return on loans and the high profit margin of speculation in real estate and securities, the latter increased as land prices grew steadily higher.

In 1976 the Government established a Ministry of Labor, reflecting its growing concern with developments in the labor and in the Arab oil countries. As a result of the narrow demographic base of the Jordanian labor market, wages tended to rise. Eventually, a clear gap developed between demand for manpower and the supply, to the point where the Jordanian Civil Service Office, where long lines of job applicants had been a normal sight in earlier years, was experiencing difficulties in recruitment for public vacancies. Under growing pressure to obtain qualified personnel, the Government decided to award special allowances to teachers in shortage (science and English) and to engineers, physicians, and accountants. Ultimately these emergency extra payments became the general practice. In the private sector, after 1978 the labor unions succeeded in obtaining wage increases that exceeded the rate of inflation. Wages would have grown much higher had it not been for the importation of foreign workers and the entry of more women in the labor market.

In the commodity market, demand rose for all kinds of consumer and capital goods and raw materials. This was accompanied by a sharp increase in prices of some imports, particularly petroleum, sugar, and rice. The oil bill soared from about 4.6 million dinars in 1972 to over 122 million dinars in 1980. Imports showed staggering increases, from about 276 million dinars in 1976 to more than 716 million dinars in 1980. Between 1976 and 1980, prices rose at an average annual rate of about 16 percent, most of the increase being in the prices of foodstuffs.

To ease the pressure on low-income households, and because of the growing distortions in income distribution—especially among the civil servants and the rural population—the Government took several steps in the commodity market, including measures to strengthen the staffing of the Ministry of Supply and to fix the prices of about 40 items. These included meats, rice, wheat, bread, petroleum derivatives, and all locally produced commodities receiving direct state subsidies. The Government also was determined to allow only very slight increases in electric and water rates, expanded purchasing by the Civilian and Military Consumer Corporation, and referred price violations to a special military court for speedy decision. Later, a basis was developed for the pricing of vehicle spare parts and pharmaceuticals. Despite pressures to review the Landlord and Tenant Law, the Government refused to raise the rents on occupied premises. While this law does not limit the rate of return or intervene in the setting of the initial rent, it does not allow any subsequent increases by the lessor. The growing demand for housing, stores, and office space led to sharp increases in new rents and to high “key money” payments on first-time leases. The construction of public, cooperative, and private housing proceeded apace, but the annual demand for apartments amounted to 17,000 units, of which no more than 10,000 could be provided at best. Rising new rents resulted in higher land prices and construction costs. This period saw the emergence of lines in front of bakeries and a serious cement shortage, the latter leading to government intervention to ensure availability of cement and to expand the plant’s output.

The growing surplus demand was reflected in sharply increased prices for goods and services and in shortages in some items. Government planners, driven by a psychology of scarcity, sought to ensure by every means the availability of goods to satisfy the population’s insatiable desire for more consumption and building. In its intervention to prevent continuous new price increases, the Government resorted to higher subsidies of electricity, petroleum derivatives, and essential foodstuffs. The total for these items exceeded 50 million dinars. In 1979, the Government raised the price of bread but a strong popular reaction forced it to submit a white paper explaining its position to the National Consultative Council. The Government finally had to recall the price increase for bran—which is sold as subsidized fodder to livestock farmers—although it did not retract the new prices for bread.

We have thus seen that the action of economic factors created interrelated surpluses in the subsidiary markets. While there was a surplus in the money supply and in the demand for credit, the policy of the Central Bank allowed only very slight increases in the interest rates, especially since the Government had increased its domestic borrowing. We have seen a surplus of demand in the labor market leading to higher real wages and the increased importation of manpower. The commodity market also witnessed surplus demand that produced higher prices and a rising cost of living. New contract rents increased considerably during the period, generating large-scale construction activity which, in turn, led to surplus markets. Demand for Jordanian manpower was active both locally demand for construction materials. This meant further intervention by the Government as employer, commodity subsidizer, and regulator of prices and quantities, and naturally resulted in higher government spending—which rose from 119.5 million dinars in 1973 to 563 million dinars in 1980; an annual increase of 24 percent. Government expenditure as a percentage of GDP registered a level of 68 percent in 1980.

Economic developments moved much faster than the Government’s ability to develop proper adjustment measures capable of controlling the market. Direct government intervention in the areas of prices and supply weakened the role of the private sector in the development process. The above-mentioned policy was unsuccessful, despite earnest efforts to limit the demand for credit, which was encouraged by stable interest rates that made the cost of borrowing for consumption and production seem very low. Similarly, government restrictions on the prices of goods and services, which prevented the free interplay of supply and demand, increased the demand for consumption. The exchange rate of the Jordanian dinar, determined by its value in relation to the major currencies, rose against them and especially against the dollar, which facilitated imports and encouraged borrowing. But the strong development momentum and the continued inflow of foreign exchange concealed the distortions that had developed in the market and postponed their coming to the surface. These policies as a whole, however, were successful in preventing prices from rising to even higher levels.

The Fifth Phase (1981–85)

This marked the beginning in Jordan of a process of adaptation as oil prices began receding at the end of 1982 and large-scale projects initiated during the previous development period were completed. In the late 1970s and early 1980s Jordan had drawn up a new economic plan based on the opportunities created by the oil boom. As its implementation began, that development still appeared to be the most pressing need, especially since the Government’s efforts to satisfy the market needs and to fill the gaps in the various markets had managed, by late 1980, to contain the increase in the cost of living: in 1981 inflation declined to 7.7 percent as against 11 percent and 11.2 percent in 1980 and 1979, respectively. With the inflationary spiral thus contained, under conditions of full employment, a sustained development impetus, and rising oil prices, and given Jordan’s good reputation in world markets, the time seemed appropriate to turn the country from a society dependent on others into one that was capable of relying on its own potential for its advancement.

Consequently, the Development Plan for 1981–85 was very ambitious: expenditures were set at about 3 billion dinars, and the completion of large-scale investment projects was envisaged. But in early 1983 developments began to take a new turn.

The war between the Islamic Republic of Iran and Iraq began to take a new course that affected the hitherto optimistic economic climate. As some of the Gulf Cooperation Council (GCC) countries were forced to review the volume of their aid to other Arab countries, a number of Arab nations suspended their regular assistance to Jordan, leaving only two donors, Saudi Arabia and Kuwait. But as world demand for oil began to decline, Kuwait rolled back its aid by 40 percent by parliamentary decision. Demand for Jordanian manpower declined in 1983, and Jordanians stopped working in GCC countries, except Saudi Arabia. Furthermore, Jordanian labor faced increasing competition from workers from heavily populated Asian countries with labor surpluses. Sharp competition also came from some countries, such as Turkey, which replaced Jordan as supplier of vegetables, fruits, and some other items to the oil countries. Jordan had restricted exports of vegetables and fruits in the late 1970s in order to ensure their availability for local consumption at reasonable prices. One result of this decision was that importers in the GCC states turned to Turkey and other countries long anxious to export to the region. On the domestic scene, certain aggregates were beginning to undergo unexpected changes in trend that placed many investors in serious financial difficulties. For a more detailed analysis of the then-prevailing conditions in the Jordanian market, one should go back again to Patinkin’s model, which explains how the various economic factors start to lead an economy into decline.

In the goods and services market, retreat of Jordanian exports in world markets was beginning to have an adverse and negative impact on growth rates. The prices of phosphates, potash, fertilizers, and cement fell sharply at the very time when Jordan had completed production facilities in most of these industries and was hoping that they would push the economy forward. The fertilizer and potash plants, which had cost more than $800 million, had been financed mostly with concessionary and commercial foreign loans. There were, in addition, delays in execution and cost overruns. But world prices for these two items fell 20 to 25 percent although the prices of imported inputs were rising. Sulphur, 350,000 tons of which were being imported for the phosphate fertilizer plant, increased in price from about $ 18 per ton in 1983 to $150 per ton in early 1985. Meanwhile, the cement plant in southern Jordan, with a production capacity estimated at about 1.8 million tons a year, faced a decline in cement prices to less than $40 per ton, which is equivalent to the current unit cost of production. Oil prices, on the other hand, kept rising until the end of 1984, forcing the Government to continue to increase the prices of oil by-products, while the oil refinery’s profits were limited to the extent allowed by the Government under the Concession Law, which provides for an annual distribution of at least 6 percent in dividends.

Although the Iraqi market opened its doors to many Jordanian products that were accorded preferential treatment, Iraq was beginning to reduce its consumer imports in order to save its resources for a war that now seemed likely to continue much longer than had been expected. Exports to Iraq thus suffered a sharp decline of 50 percent in 1983. In 1984, the Jordanian Government agreed to postpone the receipt of payment to Jordanian exporters for goods delivered to Iraq, while the Central Bank discounted the letters of credit presented by Iraq. An agreement was also concluded to import part of Jordan’s oil requirements from Iraq, instead of the Tapline Company, in payment for Jordanian exports. The Government was actively trying to open new markets in Egypt, Tunisia, the Yemen Arab Republic, Bahrain, and some countries of Eastern Africa, but the resulting volume of trade was limited. Accordingly, small- and medium-sized manufacturers began to feel the effects of reduced exports and lower domestic demand, forcing many to produce much below capacity. For instance, the wood products plant could not continue production and ultimately had to close down. The Government resorted to high customs duties to protect certain industries such as aluminum, glass, and floriculture.

By early 1984 several salient realities were emerging on the economic scene. These were the need for export subsidization; the need for import control; and the need to resort to protection in order to achieve import substitution in respect of goods and services. To attain these objectives, the Government pursued several policies. One policy was the review of the Law for the Encouragement of Investment and the granting of generous tax and custom concessions, especially for the establishment of industries in rural areas and remote locations outside of Amman. Another policy involved export promotion, through support of the Commercial Centers Corporation and the conclusion of bilateral agreements with many countries such as Egypt, Iraq, the Syrian Arab Republic, Tunisia, and the Yemen Arab Republic. Another government policy was to impose higher duties on imported goods competing with locally produced substitutes. The Government also extended support to manufacturers by reducing the price of fuel oil to industries making intensive use of petroleum. Several efforts were also made to attract investment to Jordan. These efforts included holding two conferences of Jordanian expatriates to encourage investment at home, by entering into investment agreements with some oil countries (for example, Saudi Arabia and Kuwait) and forming joint holding companies with them, and by signing bilateral trade protocols with Egypt, Tunisia, Iraq, and the Syrian Arab Republic.

However, these efforts have yet to prove their effectiveness. It transpired that the volume of investments during the boom years of 1976—82 had exceeded expectations. The Government, accordingly, tried to organize production units by merging the two cement companies, selling the fertilizer company at Aqaba to the phosphates company, and merging firms in the areas of insurance, finance, and foreign exchange trading. A draft company law was prepared to reflect the changes in the economic situation and to allow takeovers of problem companies by stronger firms in return for tax incentives. It is, however, too early to assess the adequacy of such measures.

The economic recession that began in 1984 and continued through 1985 resulted in a gradual decline in the volume of imports. Exports, on the other hand, rose in 1984 and maintained that level in 1985. This balance of payments achievement may seem greater than it really was, for it was largely due to the import decrease in the wake of lower demand and falling prices for essential commodities such as petroleum, sugar, and wheat. The higher exports were made possible by the fact that several major industrial projects, such as the potash and fertilizer plants, finally achieved full capacity after three years of operation. In fact, the country’s export earnings would have been much higher if it were not for the fall in prices.

The surplus demand position in the market for goods and services thus turned, after 1983, into a condition of surplus supply, so that a buyer’s market supplanted the seller’s market. The emphasis in government subsidies shifted from essential consumer goods to production and exports. The result of all this was a stable cost of living index, which rose 3 percent in 1985.

In the labor market, the first clear indications of unemployment came in 1985. On the one hand, demand for Jordanian manpower declined in every country and workers were being laid off in some of the GCC countries. Although no statistics are available on the number of returnees to Jordan, the figure is estimated at about 8,000 in 1984 and an additional 17,000 in 1985. On the other hand, manpower supply was increasing rapidly. An estimated 12,000 men complete their military service each year, and about 20,000 persons are graduated from colleges and universities. Thirty thousand jobs thus need to be created each year. Many workers also lost their jobs because of factory closings, retrenchment in some sectors like transportation and construction, and reorganizations in the public sector. There is also a paradox about the Jordanian labor market that requires solution. Educated people turn down many of the available job opportunities, and those are filled by non-Jordanians, particularly in low-paid services and in farming. Nor do Jordanian workers accept lower wages. Accordingly, notwithstanding the unemployment, the wage index has not declined. The unemployment problem in Jordan is really unemployment of the educated. Hence the growing call for reconsideration of the issue of education and the need for linking it to the requirements of the marketplace. Jordan now has 18,000 engineers, more than 12,000 physicians, and many new graduates without jobs. The unemployment problem will therefore constitute the main focus of adjustment policies in the future.

The money and finance market began to undergo a painful adaptation to the new conditions developing in the other markets. Until 1983, banks were making good returns on their investments. Some registered annual profits of over 30 percent. The volume of bank assets grew at such a high rate that in the 1976—83 period many banks were tempted to expand credit. With the economic recession, however, the banks ran into payment delays by borrowers and increased demand for credit on the part of customers desiring to settle other commitments. Banks began refusing to serve customers with bad credit standing or who had reached their credit limits.

Banks also began to shift their lending operations to government and public institutions or to offer government-guaranteed loans. The rollback in the growth of money supply and demand for private credit did not produce a comparable reduction in interest rates; the level of interest rates was even higher in 1984 than in 1978, although inflation was at 15 percent in 1978 and only 4 percent in 1984.

In 1984, the money market was caught in a liquidity trap. Savings and term deposits became the preferred investment among the clients. This trend was further strengthened by falling stock prices in the Amman financial market. After a period of active speculation, between 1981 and 1983, on the assumption that investment in new companies would yield higher returns, stock speculation fell sharply in 1984 and after. Many investors, having incurred huge losses from speculation, henceforth preferred the safety and security of low-risk deposits with high liquidity and reasonable return. Supply and demand conditions in the credit market were thus mixed: while there was demand for credit that banks could not satisfy, owing to the higher risk involved in lending to customers and investors who had taken losses, the banks were in a state of high liquidity but could not find the right clients. The situation was further aggravated by a decline in real estate and land prices. While Jordanian workers abroad had expanded their investments in this area during the boom years, they now preferred financial investments. The Government and private sector had also indulged in real estate investment and the supply exceeded the demand. The new real estate investment companies and the Islamic-oriented banking institutions also contributed to this situation. As a result, demand for real estate and land declined and the surplus of dwelling units is now estimated at about 5,000, according to Ministry of Housing sources. Rents, however, did not go down, because the landlords feared that if they reduced rents the Landlord and Tenant Law (amended in 1983 to allow for some flexibility in rents) would prevent them from demanding any significant increases in the future. Declining real estate prices created difficulties for the banks because nearly 80 percent of loans to the private sector were secured by real estate. Banks found themselves in an untenable situation wherein they could neither press too much for repayment of outstanding loans nor abstain from pressing for timely repayment. This situation could be held to blame for the complications that arose in the system of payments and their flow through the economy.

It may thus be concluded that economic performance during the 1981–85 period was mixed. In the first two years, the Jordanian economy achieved relatively high growth rates (6 percent), although this was much below the 12 percent target of the Five-Year Plan. The period from 1983 to 1985 marked the beginning of a slowdown followed by a recession. Price and output indicators moved in the opposite direction from the trend of the boom period of 1976–80. This led the Government to lay more stress on recovery, but through ad hoc policies that were much less integrated than those taken earlier to deal with inflation. The country still planned to achieve its economic objectives amid the region’s prosperity. But the subsequent deterioration in world economic conditions and developments in the Middle East caught up with the Jordanian economy before it could reach the end of the road. The result has been an increasing burden on successive governments seeking to preserve economic achievements and reach their goals, at a time when they faced a decline in revenue. In 1983 and 1984, the Government came close to balancing its current expenditures with its domestic revenues—a long-desired goal—but it seems that the burden of economic recovery and adjustment of the economic course will make this an unattainable goal for the time being.

The Sixth Phase (1986 to present)

Guarding against excessive optimism which might lead to unfavorable results, the Third Five-Year Plan of 1986–90 provides for moderately optimistic objectives, but also for considerable expenditure. Total planned investments, including expenditures on the West Bank program, amount to more than 3.5 billion dinars (about $10 billion). The target for the first year has not yet been reached. But the plan has followed a judicious approach by providing for the gradual raising of growth rates during the following three years to achieve average GDP growth of 5.1 percent. The plan, involving considerably higher spending than the previous ones to achieve a somewhat modest rate of growth, seeks to achieve two main objectives:

  • To accomplish the required adjustment under the new economic conditions.

  • To promote growth by completing the infrastructure and suprastructure and bringing about a qualitative change in the Jordanian economy.

Developments in the foreseeable future make it incumbent upon Jordan to formulate its economic policies with great care. It has passed the phase of easy addition to the economy and entered the world of trade-offs. It has become evident that investments in any field must prove to be financially, economically, and socially justified before they are embarked upon under pain of higher future costs and damage to other important priorities.

Second, economic management should bear in mind that adjustment must be based first and foremost on domestic policies. In an economy where investments lead the economic cycle, and where external influences are preponderant, it is unreasonable to tolerate tax and monetary policies of limited effectiveness. It is important to develop effective instruments of domestic control so as to counteract the impact of external influences on the economy.

Third, many painful decisions should not be put off by resorting to external assistance. Some of those decisions must be taken. The present administration, which took over in 1985, has begun to emphasize the need to strengthen the private sector, whose economic role suffered during the boom period. Unless there is a clear-cut effort to support the role of the private sector, the ominous unemployment problem, which may lead to serious turmoil in the coming years, will force the Government to interfere further in the management of the economy to remedy this situation, not only for economic and investment considerations, but also for social and political reasons. Hence, the opportunity for economic normalization would be lost and the supporters of the private sector would have to keep quiet for the time being.

Fourth, the Jordanian economy is in pressing need of improved productivity to enhance its relative advantage in exports and for a better distribution of remuneration relative to economic performance. The price increases that took place during the boom years, despite direct government intervention, have evidently shown no sign of abating under the conditions of economic recession. Interest rates, labor wages, rents, and prices of many goods and services are not likely to go down soon, which results in higher production costs. The Government took two measures in 1985 and 1986 to test market response to lower prices. The first was to float prices of vegetables and fruits as a means to help farmers, but this caused such prices to rise. This decision was soon retracted under consumer pressure, in favor of price control. Meanwhile, interest rates were reduced by 1 percent on deposits, by decision of the Central Bank in November 1986, in the hope of reducing lending rates. Although the decision was resisted by the banks on grounds of its impact on the cost of their earlier debts, the Central Bank’s insistence on pursuing this policy succeeded in affecting deposits and lending rates. It also resulted in increased activity in the Amman Stock Market. It is, however, too early to pass judgment on the success of this policy, although initial results should encourage the Central Bank to effect further reductions to promote the liquidity cycle and encourage investment.

The fifth consideration is that the balance of payments policy should be the preferred alternative to an exchange rate policy in overcoming the acute shortage of foreign currency holdings. Caution should, however, be taken against excessive application of a policy of isolation and protectionism. There have been strong calls for substitution of imported goods and services. Measures were taken by the Government in this direction, which included raising tariff rates, export subsidies, the conclusion of trade protocols, and increasing exports under reciprocal trade arrangements. A number of obstacles have also been placed in the way of foreign contractors and workers, with the aim of employing more Jordanians. It seems that these policies will continue, and no one could dispute their usefulness in the short run—particularly if the alternative is an unreasonable manipulation of the exchange rate.

It was recently rumored that a devaluation of the dinar was imminent (a de facto devaluation had already taken place vis-à-vis certain currencies). The negative consequences of such a step are extremely serious as it could lead to large-scale unloading of dinars and increased capital flight, not to mention its negative impact on the savings of West Bank people, who have been buying dinars and unloading Israeli currency in accordance with Gresham’s rule. If the trade policy does not succeed in improving the balance of payments, the alternative will be to impose restrictions on the movement of foreign exchange—a step that is incompatible with the longstanding policy of Jordan, which reaped great benefits from the free movement of foreign exchange.

Improved quality and reduced cost of production are also required to enhance competitiveness, both locally and abroad. Recent studies on some major factories have shown that labor productivity has declined and that capital/output ratio was about 11:1 from 1980—85 and is expected to decline to 6:1 during the period 1980–90, which is still below the desired level. The fall in the two ratios, however, may be attributed to historical circumstances; but the success of the present Five-Year Plan is dependent, to a large extent, on improvements in productivity.

The sixth consideration is that Jordan will be faced with a major problem under conditions of the international redivision of labor. Jordan is a relatively small country with limited energy resources. The changes in the map of international division of labor will not therefore be in its favor, unless it can mobilize its highly qualified manpower, to become a service center based on advanced science and technology. This, in turn, will require further regional cooperation and collaboration with institutions in developed countries as well as removal of investment, tariff, and administrative constraints. It will require the adoption of flexible policies in education and training that would contribute to the proper formation of manpower to catch up with the current technological advances.

The seventh and final consideration is that the issue of the state budget will remain a basic dilemma in future policies. The calls for privatization and market organization may require large sacrifices on the part of the Government to promote the success of such policies and to enhance the role envisaged for the private sector. The conditions of economic recession do require reduced taxes and charges. But the Government must, at the same time, bear the burden of firm commitments such as in the areas of defense, education, the West Bank, and repayment of external debt. The search for an appropriate formula for fiscal policy will be an extremely difficult undertaking.


The preceding observations about adjustment and development in Jordan reveal that correction and adaptation to the new conditions will acquire greater importance and will become, in due course, independent of development policies. The research student will find difficulty in making a distinction between the ex ante and ex post adjustment policies. It is also difficult to distinguish between the objectives of economic policies and to find out whether they seek to achieve development and distribution or to correct the economic course.

Analysis is rendered even more difficult if we consider that Jordan has generally adopted pragmatic and ad hoc policies to face economic problems, rather than relying on established and clear frameworks. It may thus be said that Jordan is free of fixed dogmas. Its response to external developments and sensitivity to political and economic interactions in the surrounding region have led it to adopt a pragmatic approach.

Thanks to its flexibility, however, Jordan is able to bear the hardships involved in adjusting to new conditions. The Jordanian economy has demonstrated its resilience in the face of severely adverse conditions following the 1967 war and the inflationary pressures between 1976 and 1980. It has also achieved relatively high rates of growth since 1952. There is also tolerance of self-criticism that enables Jordan to confront reality with the right approach. It is evident that, henceforth, adjustment will increasingly depend on domestic policies and much less on external inflows. The following phase will be most critical; it will test the ability of the country to face the challenges that are ahead.


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