Chapter

9 Jordan: Restructuring Public Expenditures and Protecting the Poor

Editor(s):
Ke-young Chu, and Sanjeev Gupta
Published Date:
April 1998
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Author(s)
S. Ehtisham Ahmad

Jordan suffered from unsustainable macroeconomic imbalances, particularly with respect to the fiscal and trade deficits, during the mid-1980s. Necessary adjustments have been constrained by the need to protect the poor and those on relatively low fixed incomes from the effects of relative price changes. Thus, while there has been a substantial depreciation of the Jordanian dinar, the less-than-proportional pass-through of price changes, particularly for imported food items and energy, has led to increased pressure on budgetary subsidies. In this paper we examine possibilities for reducing subsidies in a manner that protects the poor. We also examine other elements that would be necessary for an effective provision for the poor and vulnerable in Jordan. Many of the recommendations in connection with subsidy reduction and the protection of the poor have been put in place. It would be interesting to follow up with work on the implementation and its effects, as a guide to policymakers not only in Jordan but also in other countries for which similar policies might be considered.

Macroeconomic Imbalances

Jordan experienced a GDP growth rate of 8 percent a year during 1978–82, which was not sustainable. The relatively high levels of government expenditure, over 50 percent of GDP on average during 1978–82, had led to overall deficits in excess of 30 percent of GDP, two thirds of which (or around $1 billion a year on average) was financed by external grants. With a slowing of growth in the region in the mid-1980s, and a concomitant reduction in the level of grants (which declined to around $550 million by 1988), the regional recession affected Jordan severely, with growth dropping to 1.2 percent by 1985, and becoming negative by 1988. There was also an increase in the “after-grants” budget deficit from around 12 percent of GDP in the early 1980s to over 15 percent in 1988; the budget deficit “before grants” remained high at about 25 percent of GDP in 1988.

Compounding the budgetary crisis was a critical external debt-servicing situation. Jordan’s total debt (disbursed and undisbursed) outstanding by 1989 amounted to about 180 percent of GDP. Debt-service payments as a ratio to exports of goods and services rose to 28 percent in 1988 before declining to 18 percent in 1989 as a result of rescheduling. This has exacerbated a precarious balance of payments situation. In addition, with the delinking of the West Bank from Jordan in mid-1988, there was substantial capital flight that created speculative pressures on the Jordanian dinar (JD). Reserves fell to about two weeks of imports by the end of 1988.

The response to the reserve and balance of payments situation has been a depreciation in the value of the currency from JD 0.33 per U.S. dollar in mid-1988 to JD 0.673 = $1 in March 1990. Since virtually all of Jordan’s food is imported, the effect of a limited pass-through of the effects of the depreciation of the dinar on domestic consumer prices has led to an increase in expenditure on food budgetary subsidies from about 1 percent of total expenditures in 1985 to 7.3 percent for 1989 (preliminary estimates). There has been a reduction in total government expenditure as a proportion of GDP from 46 percent in 1985 to around 41 percent in 1989, and, correspondingly, there has been an absolute and a relative decline in capital expenditures both in relation to GDP (9.1 percent to 7.7 percent) and to total expenditures (20 percent to 19 percent) over the same period. To the extent that this jeopardizes the country’s future growth potential, the reduction in capital expenditures will make the process of recovery for Jordan more difficult.

Jordan has had fairly stable revenues, which have averaged around 25 percent of GDP. But the revenue system is generally inelastic and the government has had to resort to discretionary measures to keep the revenue-to-GDP ratio from falling. Structural measures on the tax side have been initiated, with IMF support, but some of the burden of adjustment is likely to bear on the expenditure side, particularly in the short run. The adjustment would be facilitated, however, if the poor might be protected from or compensated for any adverse real income effects.

The Poor and Their Characteristics

There are two sources of data on the characteristics of households in differing circumstances and on the incidence of poverty in Jordan: the 1987 Household Income and Expenditure Survey conducted by the Department of Statistics and the Health, Nutrition, Manpower and Poverty Household Survey for 1987. Unfortunately, more recent data are not available. We shall use the quantities consumed by household groups from these surveys in assessing the incidence effects of price changes on particular groups.1

We do not attempt to estimate caloric requirements or very precise poverty lines for Jordan but work with the poorest deciles, juxtaposed against the richest two deciles, to establish a relatively clear picture of how these different household types might be affected by particular policy options. Note, however, that the Ministry of Planning has estimated minimum consumption requirements for 1987 to be equivalent to JD 15 per capita a month, which corresponds to the mean expenditure levels of the poorest 20 percent of the population (of just over 3 million people). Since real incomes have fallen in the post-1987 period, relevant target groups, as far as the government is concerned, would roughly correspond to those in the lowest two or three deciles of the population.

For policy, it is important to identify with which broad groups the government is likely to be concerned. In Jordan, these include (1) low-wage employees, particularly in the public sector; (2) the unemployed; and (3) those unable to participate in the labor market. It is clear that low-income public employees, with earnings up to JD 170 a month, are at or below “poverty thresholds,” given their relatively large family sizes (often up to ten members a household). Relative price changes, which adversely affect the minimum consumption expenditures of such groups, would thus exacerbate the problem and result in a large number of households being classified as poor. Thus, a prime policy objective would be to tailor relative price changes in such a manner as to protect the minimum consumption expenditure of low-income households, including the current poor and those who are at risk of being pushed deeper into poverty.

The 1987 Poverty Survey suggests that there are a number of distinct groups within the ranks of the unemployed that will require different policy responses. The first is a group of middle-aged or aging males (45 or over) who are not likely to be educated beyond the preparatory level and who have worked in manual occupations. They are at the greatest risk of poverty, as they tend to be heads of households without alternative means of livelihood or support. The second is a group of young, educated entrants to the workforce, both male and female. While the export of educated manpower has been one of the mainstays of the Jordanian economy, owing to the remittances generated (prior to the current upheavals in the Middle East), traditional values dictate that females are less likely than males to be part of this expatriate labor force. The rate of unemployment for females was 28 percent in 1987, as against 13 percent for males, and most of the unemployed females were educated and under 25 years of age. However, given the structure of family support, this group is less likely to be at risk of poverty than the ones described above.

Given the labor market conditions in Jordan, an area of policy concern appears to be to protect the minimum living standards of the poor; this is likely to involve the overall design of subsidies and consumer prices. It is also important to provide for groups unable to participate in retraining or the labor market, including the relatively elderly, nursing mothers, and poor children. Old-age pensions and targeted transfers, often in kind, are therefore likely to be important. Finally, the government may wish to ensure a minimum income for the currently unemployed, and for those who are likely to become unemployed as a result of the restructuring of the public sector. Here, measures to use the proposed Development and Employment Fund effectively may well be crucial.

Food Subsidies and Protecting the Poor

Under the current system of consumer price and subsidies, domestic prices for a range of food items have been left unchanged, despite the large depreciation of the Jordanian dinar since 1988. This has led to a growing subsidy for food items amounting to around 2 percent of GDP in 1989, exacerbating the already serious overall budgetary deficit. The program presented below suggests that there is considerable scope for reducing this bill in a manner that protects the poor and the lower-middle classes and eliminates production and consumption distortions. The proposed program consists of:

  • short-term measures that, given price changes, the introduction of rationing for limited items, and a degree of targeting, would reduce food subsidies;

  • compensatory mechanisms to offset any negative impact of commodity price “corrections” through direct transfers to the vulnerable and through wage adjustments; and

  • a medium-term reform of the pension and social security system to promote greater equity and efficiency and the pooling of risk across generations.

Current System

A consumer subsidy could be defined as the difference between the price the consumer actually pays and the total cost of delivering the commodity to the retail outlet. For an imported food item, the total cost would include the c.i.f. import price, a margin for the cost of trade and transport, and a profit margin for the wholesalers and retailers. A budgetary subsidy, on the other hand, is the difference between the c.i.f. cost of importing, plus the trade and transport cost of delivering to the wholesaler and the price charged to the wholesaler.

Of the total budgetary subsidy of JD 98 million in 1990,2 76 percent is likely to be on wheat, sugar, and rice; the remaining 24 percent on milk, maize, sorghum, and barley (Table 9.1). The largest subsidy, amounting to JD 39 million, or a little less than half the total outlay, is for 0.4 million tons of imported wheat, which is delivered to millers for JD 35 a ton while costing JD 130 a ton. Imported wheat also bears the highest consumer subsidy rate of 146 percent. Jordanians are able to buy flour at JD 75 a ton while the cost of importing, transporting, and milling the wheat is estimated to be about JD 185 a ton. Sugar is another essential consumption item that is heavily subsidized, with a consumer subsidy rate of 140 percent and a projected budgetary outlay of JD 25 million for 1990. Rice is the other major food item bearing a consumer subsidy rate in excess of 100 percent. The budgetary outlay on subsidizing meat products has recently been reduced. There is no budgetary subsidy on imported lamb and only a small budgetary subsidy on imported beef. However, the price of domestically produced meat is substantially higher than that of imported meat. This price differential is partially offset by subsidized inputs, such as barley and maize used as domestic animal feedstock.

Table 9.1.Jordan: The System of Subsidies in 19901
Item Imported AProjected Consumption BCost of Supplying WholesalersResale Price to Wholesalers2 FRetail Cost3 G = E*l.09Consumer Price HConsumer Subsidy Rate (H−G/H)*100Budgetary4 Subsidies (F − E)*B
CIF price CTransport cost DTotal E = C + D
(In thousands of tons)(Jordanian dinars a ton)5(Jordanian dinars)(Jordanian dinars a ton)(In percent)(in millions of Jordanian dinars)6
Rice702788286125310140−12111
Wheat
Imported40012281303518575−14638
Domestic2512580179140−281
Sugar1403008308128336140−14025
Milk75851711811.519.612−634
Lamb
Imported111,5861,6903,2861,800
Domestic92,500 to 4,000Input subsidy
Beef
Imported111,475901,5651,0501,9351,400−386
Domestic22,500
Maize15561810375103−374
Sorghum155618695569−252
Barley16095810460104−737
Total subsidy98
Sources: Jordanian authorities; and IMF staff estimates.

Estimates of subsidies before the reform measures that were introduced during 1990.

Resale price to wholesaler is the price at which the government sells the imported or domestically procured item to the wholesaler.

The retail cost = cost of supplying the wholesaler + a profit margin of 9 percent. This formula is used for most commodities. For wheat, milling costs of JD 35/ton and a profit margin of 12 percent are assumed. For maize, sorghum and barley, there is no retail margin because these items are not retailed.

Budgetary subsidy = cost of supplying wholesalers – the price to the wholesaler.

The price is quoted in dollars a ton and the exchange rate used is $1 = JD 0.675.

Figures are rounded to nearest million.

All quantities for milk are expressed in terms of thousands of cartons of 12 kilograms each. Prices in JD/carton.

Sources: Jordanian authorities; and IMF staff estimates.

Estimates of subsidies before the reform measures that were introduced during 1990.

Resale price to wholesaler is the price at which the government sells the imported or domestically procured item to the wholesaler.

The retail cost = cost of supplying the wholesaler + a profit margin of 9 percent. This formula is used for most commodities. For wheat, milling costs of JD 35/ton and a profit margin of 12 percent are assumed. For maize, sorghum and barley, there is no retail margin because these items are not retailed.

Budgetary subsidy = cost of supplying wholesalers – the price to the wholesaler.

The price is quoted in dollars a ton and the exchange rate used is $1 = JD 0.675.

Figures are rounded to nearest million.

All quantities for milk are expressed in terms of thousands of cartons of 12 kilograms each. Prices in JD/carton.

Reforming the Present System: A Rationale for Limited Rationing

It is possible to reform the existing system of administered prices and bring about a substantial reduction of budgetary outlays. This involves limiting the use of general subsidies, introducing rationing for selected items, and taxing items consumed mainly by the rich.

General Subsidies

A general subsidy implies that consumers could potentially purchase unlimited quantities of an item at the subsidized price. If budgetary outlays are limited through shortages, a system of ad hoc rationing operates through queues, which are either random or favor the rich and well connected. In principle, only inferior goods justify a general subsidy. At present, however, the general subsidies on a range of commodities, as described above, make substantially greater income transfers to the rich and middle classes than to the poor, and also represent open-ended budgetary commitments. It is only for imported Zero No. 1 flour that a greater than proportionate benefit accrues to the bottom 10 percent or 20 percent of the population (Table 9.2). This is the only potentially suitable item for a general subsidy. For a given budgetary outlay, there are substantially greater transfers to the richest, than to the poorest deciles, for commodities such as high-quality local flour, bread, sugar, and, in particular, rice and meat. However, political and administrative realities suggest that a general bread subsidy is likely to remain in Jordan in the medium term. This can, however, be targeted by increasing the bran and fiber content of the subsidized bread, leading to more cost-effective transfers in the longer run.

Table 9.2.Jordan: Benefits Relating to One Jordanian Dinar in General Subsidy by Commodity
ItemDeciles
1234910Total
Flour
Zero No. 10.1450.1010.1280.1210.0900.1001.000
European0.1490.0880.0890.1410.0880.0741.000
Mixed0.0760.1180.1190.0990.0790.0601.000
Local0.0620.0870.0790.1010.1030.0781.000
Bread0.0750.0870.0890.0960.1110.1331.000
Rice
United States0.0320.0500.0280.0410.1870.3621.000
Other0.0480.0600.0730.0830.1450.1461.000
Mutton imports0.0100.0230.0280.0480.1870.3421.000
Veal imports0.0350.0490.0650.0750.1670.1851.000
Sugar0.0600.0770.0860.1100.1230.1151.000
Sources: Jordan, Department of Statistics, Household Income and Expenditure Survey (1987); and IMF staff estimates.Note: In this analysis, it is assumed that a general subsidy of JD 1.000 is allocated to each of the above commodities. The resulting benefits are described for the lower four deciles and the highest two deciles. If the benefit exceeds JD 0.100, then the subsidy provides more than proportional benefits. A uniform ration would generate equal benefits to all deciles (if not targeted further). In the Jordanian case, only a general subsidy on flour (either Zero No. 1 or European varieties) would be more progressive than a ration.
Sources: Jordan, Department of Statistics, Household Income and Expenditure Survey (1987); and IMF staff estimates.Note: In this analysis, it is assumed that a general subsidy of JD 1.000 is allocated to each of the above commodities. The resulting benefits are described for the lower four deciles and the highest two deciles. If the benefit exceeds JD 0.100, then the subsidy provides more than proportional benefits. A uniform ration would generate equal benefits to all deciles (if not targeted further). In the Jordanian case, only a general subsidy on flour (either Zero No. 1 or European varieties) would be more progressive than a ration.

Rationing

Rationing would be more cost-effective than a general subsidy for “normal” goods since it can provide limited, although equal, benefits to all and hence limit budgetary outlays. It also has useful “insurance” properties since the availability of given quantities at predetermined prices ensures that such goods are not priced beyond the means of the poor. Nonetheless, in the case of a JD 1 subsidy outlay, in principle, only 200 fils would accrue to the bottom 20 percent; the remaining 800 fils may be viewed as a “cost” or leakage if the transfer objective is the most important consideration. In determining the choice of commodities to ration, the item should be important in the consumption baskets of the poor. In Jordan, rice and sugar, which involve large outlays and are normal goods, fall into this category. For rice, additional targeting may be achieved by restricting rationing to relatively low-quality varieties, with higher-quality rice being sold on the open market without subsidy, or by using a tax to achieve a degree of cross-subsidization.

To ensure the availability of essential food items at “reasonable prices,” the government has proposed a system of in-person registration for food stamps. Food stamps, purchased in advance, would be redeemable at retail outlets. An honor code or stigma could prevent the wealthy from taking advantage of the stamps. Under this option, it is expected that the subsidy would be reduced by 60 percent. Resale of rationed items is not, in principle, a disadvantage. This system improves on the current one, which involves either an open-ended commitment by the state to provide subsidized supplies to satisfy excess demands, or random rationing with shortages. Not too much should be expected of rationing, however, and unless the self-targeting works well (so as not to exclude the poor while preventing the rich from benefiting), rationing is still an inefficient means of transferring income on a permanent basis to the poor. The main advantage of rationing is as a “protective” short-term instrument for major relative price changes. More direct mechanisms would be preferable and more cost-effective in the longer run.

During periods of scarcity or adjustment, price and income stabilization objectives often involve assured supplies at stable prices but do not invariably imply extensive subsidies. Higher free market prices reflecting conditions of excess demand would make it easier to adjust prices upward toward international prices (or social opportunity cost) for importables such as rice and sugar. The government has agreed with the IMF that this process should take place in the medium term, at which point rationing would become redundant. Nonetheless, the need for price stability remains, and this can be achieved through a combination of stock and trading policies.

Taxable Items

Poorer income groups consume little meat, so there is little justification to subsidize this set of commodities. At current prices there is considerable excess demand for meat by the middle classes, and limited quantities of imported meat are in fact subject to informal rationing. This suggests that the retail price of meat could be raised, which would be desirable for a number of reasons. First, it would be possible to make a substantial profit, which in turn could be used to cross-subsidize food commodities that are more important in the consumption basket of the poor. Second, raising domestic meat prices would curtail consumption, which is nutritionally beneficial. Third, the present low prices have resulted in price differentials with neighboring countries and have led to extensive smuggling. Finally, raising the price of imported meat would also allow an increase in the present low price of domestically produced meat. This would also allow the government to eliminate the subsidy on imported maize, sorghum, and barley, which are used as animal feedstock.

Reforming Food Subsidies

Milk is particularly useful for nursing mothers and young children, and targeting by income status may not be desirable. It would be desirable, however, to target subsidized milk to primary schools and to clinics that cater to pregnant women, nursing mothers, and infants. This would increase the attractiveness of such clinics and assist in the dissemination of information on hygiene and preventive care. Neither a general subsidy nor the rationing of this commodity is needed. The targeted provision should be accompanied by unrestricted market clearing prices for all other types of milk. The overall subsidy could thus be reduced top JD 0.9 million, from a projected level of JD 3.8 million.3

Wheat and bread comprise the main food expenditure items for the poorest quintile in Jordan, but only around 6 percent of total expenditures. Much of the wheat is imported (400,000 tons out of the total consumption of 425,000 tons in 1989/90) and is sold to mills at a highly subsidized price.4 A 12 percent profit is permitted, and bread from bakeries is priced at JD 0.075 a kilogram (kg) for “normal” loaves. This price may not be changed very easily. Notwithstanding short-run political constraints, the JD 40 million subsidy involved suggests that measures to target consumption of subsidized flour and bread should be explored. One possibility is to shift the subsidy to high-bran “brown” bread. Increasing the percentage of extraction would reduce the subsidy per se and, in addition, may make subsidized bread less attractive to better-off households.5 If the objective is to target transfers to the poor, subsidizing imported low-quality flour provided directly to consumers may be the more cost-effective alternative. This is likely to lead to a reduction in the aggregate consumption of flour, if flour is sold to bakers at cost, leading to a contraction in the demand for bread. This option may not be politically feasible. Also, if there is a shift in demand patterns, the general subsidy may continue to pose budgetary problems, and could also have negative balance of payments implications.

While rice is important in the consumption baskets of the poor, it is clearly a normal good (consumption rises from 16 kg per capita a year for the lowest decile to 52 kg per capita a year for the richest) and is an appropriate item for rationing. Lower-quality, cheaper supplies could be targeted rather than the high-quality California variety. On 54,000 tons (assuming full take-up by all Jordanians), the subsidy would amount to around JD 5 million (as against JD 11.27 million projected for 1990). The remaining demand for rice could be for higher-quality rice at cost. Given that effective prices are higher than the controlled price of JD 0.14 per kg, the true price of rice would be less than the nominal price differential of JD 0.16 per kg between the present and proposed benchmark prices.

Sugar is also appropriate for rationing given that it is an “essential,” albeit normal, commodity, which reflects current consumption patterns of the poor and the rich. A ration entitlement could be set at 18 kg per capita a year at the current price of JD 0.140 per kg. The subsidy on 54,000 tons of rationed sugar (again assuming full take-up) would amount top JD 10 million, rather than the JD 25 million projected for 1990 under a general subsidy. If the remainder is sold at cost, it would necessitate a price rise of JD 0.2 per kg. A degree of cross-subsidization is possible if open-market sales are subject to the standard rate of sales tax above the cost price.

With respect to meat prices and input subsidies, it would be desirable to eliminate all input subsidies immediately, allowing mutton, beef, and chicken prices to adjust to the new cost structure and changing patterns of domestic demand and trade. The price increases would not affect poorer consumers, since they do not consume large quantities of imported meat. Indeed, the poorest income groups purchase between one-half and two-thirds of their mutton requirements from higher-priced domestic supplies. Low meat prices benefit mainly the rich. If the prices of imported meat were raised to the level of domestic prices (e.g., through appropriate import duties), not only would the disincentive for domestic production be removed, but the measure would generate additional revenue of JD 28 million. In addition, there could be a further saving of JD 13 million with the abolition of input subsidies on barley, sorghum, and maize.6

Among the limited sets of options considered here,7 a rise in the price of commodities consumed primarily by the rich could be used to finance the system of subsidies needed to protect the living standards of various target groups. This is a progressive alternative to financing subsidies through printing money and inflation.

Consequences of Reform

Effect on Consumers

The effect of the reform program on consumers is taken as the money loss resulting from the price changes assumed. The poorest 10 percent of the population would suffer a loss of JD 5.5 per capita a year (see Table 9.3). This is equivalent to around 3 percent of the gross expenditures of this group. For employees in the public sector, salary adjustments of around 3 percent would compensate for the price changes. The richest decile would suffer a loss of around JD 68 per capita a year, or about 15 times as much as the poor.8

Table 9.3.Jordan: Distributional Impact of Price Changes(In Jordanian dinars)
Deciles (by per capita expenditures)
1234910
Food prices and rationing package
Per capita a year5.5098.21712.95018.90045.06068.030
Per household a month4.6606.6229.17313.14022.49026.870
Sources: Jordan, Department of Statistics, Household Income and Expenditure Survey (1987); and IMF staff estimates.Note: It is assumed that quantities consumed remain unchanged at survey levels. For the food price reform package, see previous tables.
Sources: Jordan, Department of Statistics, Household Income and Expenditure Survey (1987); and IMF staff estimates.Note: It is assumed that quantities consumed remain unchanged at survey levels. For the food price reform package, see previous tables.

Effect on the Budget

In the absence of reforms, the aggregate subsidy is likely to be about JD 98 million for the current year. If the program of price changes and food rationing discussed above is implemented as a package, the total budgetary subsidy could be brought down by about a third, to JD 66.5 million, without adversely affecting the poor households (see Table 9.4). For political or administrative reasons, the government may wish to phase in some of the options over a longer period.

Table 9.4.Jordan: The Revenue Impact of Possible Reforms for Food Items1
ItemSuggested ReformQuantity ACost of Supplying Wholesalers BPrice Charged to Wholesalers CCurrent Consumer Price DAssumed Consumer Price ESubsidy (−) Tax (+) (C− B)*A
(In thousands of tons)(In Jordanian dinars a ton)(In millions of Jordanian dinars)
Rice
SuperiorAllow free market sale160.0
InferiorRation as proposed54210125140140−4.6
WheatContinue with the present system7575−39.1
SugarRation54308128140140−9.7
Allow free market sale860.0
MilkProvide free to target groups52,800 cartons18 JD/carton0.9
LambSell imported lamb at a profit or place a tax on imports111,5863,2861,8003,500+18.7
BeefSell imported beef at profit or place a tax on imports111,5651,9351,4002,300+4.1
MaizeRaise prices to eliminate subsidies0.0
SorghumRaise prices to eliminate subsidies0.0
BarleyRaise prices to eliminate subsidies0.0
Total subsidy with reform31.5
Source: IMF staff estimates.

It is assumed that free market quantities will remain unchanged. In reality, higher prices will result in lower consumption, with lower import requirements. Furthermore, it is intended by the authorities that the system of ration registration will result in lower subsidy outlays. Additional targeting of general bread subsidies could also lead to lower subsidies on major wheat outlays.

Source: IMF staff estimates.

It is assumed that free market quantities will remain unchanged. In reality, higher prices will result in lower consumption, with lower import requirements. Furthermore, it is intended by the authorities that the system of ration registration will result in lower subsidy outlays. Additional targeting of general bread subsidies could also lead to lower subsidies on major wheat outlays.

Finally, the suggested program can be thought of as a core strategy, which could be logically extended as follows. The suggested rationing of sugar and rice is likely to halve the subsidy at the minimum. Further targeting, through coupons and quality differentials, is likely to reduce this subsidy even further. In addition, there may be some scope for cross-subsidization by taxing the free-market sales of both sugar and rice, and by using cheaper-quality supplies for rationing. Similarly, targeting the flour and bread subsidy is likely to generate further savings. These additional measures would increase the progressivity of the package. Eliminating input subsidies for the domestic production of meat would also lead to substantial budgetary savings while removing production distortions. Given the relative scarcity of meat products, and the excess demand by higher-income classes, there is a strong case for protecting relatively poor domestic producers through the imposition of tariffs and sales taxes on imported meat. This would remove price differentials between imported and domestic production.

Additional Provision for the Poor and Direct Transfers to the Needy

Among the poorest groups in Jordan are widows, orphans, the disabled, and the elderly with no extended family support. A proposed zakat tax would be earmarked to provide for such individuals at the local level, where costs of identifying such individuals are minimal. Identification of the needy and direct provisioning are illustrations of cost-effective targeting. The tax base would be wealth, including gold hoards, cash, and fixed assets. The imposition of the tax would likely increase the propensity to invest in productive assets and would have a positive overall effect on savings.

The reform of public sector pensions and the extension of social security benefits are of high priority, given a net amount of JD 65 million spent on public pensions in 1989 and the substantial projected rate of increase. As the amounts involved are on the same order of magnitude as the total subsidy bill, pension reform requires careful analysis and is extremely important for the medium-term fiscal and budgetary strategy, as well as for equity purposes. Given that social security funds generate huge surpluses because of the relatively young profile of workers covered, there may well be a case for extending coverage to include many workers presently in the public sector. This would ease the transition from a productive structure dominated by the public sector to one more reliant on the private sector.

Wage adjustments are likely to be accompanied by a reduction in public sector employment, which accounts for about 50 percent of the workforce. Measures to provide income maintenance through retraining and employment would be important as a means of ensuring a more effective transition to a higher level of private activity. However, additional employment provisions would have to be self-targeted through below-market wage rates. Care has to be taken not to increase the bureaucracy in this process of providing “targeted” unemployment support. The proposed Development and Employment Fund could be used to finance this activity. Apart from the purely “transfer” aspect of the program, the portfolio of projects chosen should be justifiable in terms of economic criteria for longer-run sustainability and growth. As discussed above, unemployment among middle-aged and elderly, illiterate or semiliterate (largely unskilled) workers with large numbers of dependents is a serious problem. Further, unemployment among educated entrants to the labor force, particularly females, is also a matter of concern, although the latter are likely to have some extended family support. Employment provision for this group differs significantly from that for relatively elderly, illiterate agricultural or manual workers.

The facilitation of investment opportunities and schemes targeted toward females with some skills is likely to be of increasing importance. The experiences of countries in South and East Asia with comparable educational levels and infrastructure are likely to be relevant. To ensure the protection of the poorest, investment measures would need to be supplemented by employment provision through public works at low wages (including possible in-kind payments) for the truly destitute, and with local transfers to those unable to participate in the labor market (as through the zakat schemes). The responsibility of the state should not extend beyond the provision of a minimum guarantee to those without assets or family support.

Prospects for Reform

The Jordanian government has introduced some of the measures discussed in this paper. A rationing scheme for sugar, rice, and milk, was made operational with effect from September 1, 1990. For rice and sugar, the quantities being rationed are 1.5 kg/month a person. The price schedules are similar to those shown in Table 9.1, with the subsidized price at current levels, and the nonration price set so as to realize small profits (JD 340/ton for sugar, and JD 280/ton for rice). Rather than targeting milk through schools and health clinics, a ration has been introduced. The Jordanian authorities estimate that rationing sugar, rice, and milk will lead to an annual reduction in subsidies of around JD 22 million. No attempts have been made to target the wheat or bread subsidies, although the overall outlays are reported to be lower on account of falling international wheat prices. Prices of imported beef and mutton have also been set to cover retail costs, but no element of tax has so far been introduced. There has also been a reduction, which the Jordanians estimate will be on the order of JD 3 million on an annual basis, in the subsidy on barley and sorghum used as animal feed. The direction of reform is to be welcomed, although there is still some scope for further action. It would be useful to conduct an expost evaluation of these measures in due course.

It is apparent that expenditures on subsidies can be reduced substantially without adversely affecting the poor. The principles involved in a restructuring of administered prices, with large implicit or explicit subsidies, are of general applicability in the context of transition to a more market-oriented system. As seen in Jordan, these measures have to be considered in the context of the real income levels of the poorest, keeping in mind appropriate measures to protect those who are unable to participate in the labor market. Setting reforms in motion should improve the ability of the country to weather external shocks and crises.

Note: Originally issued as IMF Working Paper 91/82 (Washington: International Monetary Fund, 1991).

These should, in principle, be modified by the effects of the price changes on consumption patterns, but economy-wide demand derivatives (or estimates of aggregate changes in demand, given price adjustments) are not presently available for Jordan. The analysis, presented in a disaggregated form ranked by various expenditure deciles, thus represents the first-round effects of the price changes.

Estimated before the reform measures taken by the authorities during the year.

This calculation is roughly based on the ratio of primary school children and nursing mothers to total population.

Import prices range from JD 110–130 a ton, whereas wheat is released to the mills at JD 34.7 a ton.

It was estimated that there could be a JD 1 million reduction in the bread subsidy if the percentage of extraction were to be increased from 78 percent to 80 percent.

It was not possible to estimate the effects of input price changes on the price of domestically produced meat products and, consequently, these effects have not been incorporated into the distributional impact mentioned in the next subsection.

In principle, we would need to examine all commodity taxes and subsidies to determine the appropriate balance between commodity pricing options (see E. Ahmad and N. Stern, “Taxation for Developing Countries,” in Handbook of Development Economics, Vol. II, ed. by Hollis B. Chenery and T.N. Srinivasan (Amsterdam: North Holland, 1988)).

These estimates are based on the quantities consumed, as reported in the Household Income and Expenditure Survey for 1987, which is the latest available; the assumption is that the quantities consumed were unchanged in 1990.

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