Jordan: Selected Issues
Author: International Monetary Fund
Publication Date:
22 May 2012
eISBN:
9781475503845
Language:
English
Keywords:
ISCR; CR; Jordan; policy stance; investment; management process; physical capital contribution; investment process; investment project; scores Jordan; Public expenditure review; Total factor productivity; Capital spending
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This Selected Issues Paper focuses on economic condition, energy subsidies, and oil prices in Jordan. Energy price subsidies pose a serious fiscal risk in the present context of increasing and volatile international prices. The macroeconomic situation in Jordan is closely tied to that of other countries in the Middle East. From a policy perspective, macroeconomic and structural policies in Jordan should be conducted in such a way that the vulnerability of the country to sudden stops or reversals of external income flows is reduced.

Abstract

This Selected Issues Paper focuses on economic condition, energy subsidies, and oil prices in Jordan. Energy price subsidies pose a serious fiscal risk in the present context of increasing and volatile international prices. The macroeconomic situation in Jordan is closely tied to that of other countries in the Middle East. From a policy perspective, macroeconomic and structural policies in Jordan should be conducted in such a way that the vulnerability of the country to sudden stops or reversals of external income flows is reduced.

VIII. Taking Stock of Public Investment Efficiency, Capital Accumulation and Total Factor Productivity in Jordan1

Given Jordan’s low levels of capital per worker and relatively efficient investment process, capital spending could have high returns. However, for increased capital spending to have a maximum impact on productive capital accumulation and output, further reforms are needed to enhance the process of evaluation of investment projects.

1. A scaling-up of public investment is central to growth. Growth rates in Jordan averaged 6 percent in the last decade on the back of strong FDI, remittances and tourism receipts. Going forward the economy will struggle in the face of limited government spending and any slowing of inflows from the Gulf—growth is likely to remain well below the average level observed in the 2000-10 period. Although the overall quality of infrastructure is decent (Figure 1), an effective strategy to boost output could consider improvements in infrastructure, particularly railroads. Arguments for boosting investment in physical infrastructure to achieve growth rest on high returns to investment in capital-scarce environments, and the deficiencies in these areas.

Figure 1.
Figure 1.

Jordan Infrastructure:

Percentile Rankings of Sub-Indicators, 2011

Citation: IMF Staff Country Reports 2012, 120; 10.5089/9781475503845.002.A008

Source: World Economic Forum’s Global Competitiveness Index.

2.Public investment spending is not always efficient. Inefficiency, waste, or corruption often distorts the impact of public spending on capital accumulation, resulting in inadequate returns to public and private investment in many countries (Pritchett, 2000). Low returns arise from poor selection and implementation of projects, waste and leakage of resources, and weak technical expertise. Accounting for public investment inefficiencies will have consequences not only for estimating returns to public sector capital, but also for decomposing output into factor accumulation and total factor productivity (TFP). Unfortunately, development accounting exercises unadjusted for public investment inefficiencies can overstate physical capital available for production and understate TFP.

3. In this chapter, we take stock of public investment management and capital stock accumulation in Jordan and calculate capital’s contribution to output per worker. Decomposing output into factor accumulation, using capital and capital adjusted for investment inefficiencies, it follows that more efficient investment spending translates into higher capital accumulation with which to increase output.

A. Efficient Public Investment

4. The public investment management process is relatively efficient in Jordan. A composite public investment management index (PIMI), which serves as a proxy for investment efficiency, scores Jordan in the fourth quartile in a sample of 71 emerging and developing countries, behind Tunisia (in the top 5) and ahead of Yemen and West Bank and Gaza which are near the bottom (Figure 1).2 The region as a whole performs quite poorly (the worst except for Sub-Saharan Africa) displaying weaknesses in all stages of the investment process.

Figure 2.
Figure 2.

PIMI overall index: Decomposition by Sub-Index by Sub-Index

Citation: IMF Staff Country Reports 2012, 120; 10.5089/9781475503845.002.A008

5. Jordan performs well in all but the last stage of the investment process. Evaluation is weak as projects are not assessed frequently; only some central government expenditures are audited and although there is registry of public sector assets, it is incomplete.3 This example points to the vastly different performance across the four stages of the investment process among countries, and highlights the country-specific policy actions that can be taken to improve investment efficiency (Figure 3).

Figure 3.
Figure 3.

PIMI Index and its Subcomponents: Select Countries in MENA

Citation: IMF Staff Country Reports 2012, 120; 10.5089/9781475503845.002.A008

B. Decomposing Output per Worker

6. A development accounting exercise is conducted to quantify the contribution of capital accumulation and TFP to output. The focus is on levels rather than growth rates, following a number of contributions to the literature, for example Barro and Sala-i-Martin (2004), who determine it is the long run differences in levels (the economic performance most relevant to welfare and the consumption of goods and services) that are most interesting to explain. Two estimates of TFP are developed: one using standard capital stocks constructed by the perpetual inventory method, and the second using PIMI-adjusted capital stocks accounting for public investment efficiency (taken from Gupta et al. 2011).4 TFP is derived from the Cobb-Douglas production function and is calculated by subtracting from output per worker the product of human capital share (αh = 0.3) and human capital, and the product of physical capital share (αk = 0.4) and physical capital. Shares are standard in the literature and human capital is derived converting “years of schooling” to human capital accumulation, following Hall and Jones (1999):

ln⁡TFPit=ln⁡ yit−αh⁢⁢ ln hit−αk⁢⁢ ln kit

Table 1 decomposes results into the contributions from factor inputs, human and physical capital and TFP.

7.Output per worker varies considerably within the MENA region. Countries with the highest output per worker—Saudi Arabia, Iran and Egypt—are those with the highest productivity and highest capital stock (Figure 4).5 Jordan, Yemen and Syria have the lowest output per worker, with Jordan producing less than most countries in the region except for Bahrain and Yemen. Looking across regions, average annual output per worker is lower in MENA than most regions, with the exception of Latin America and the Caribbean and Sub-Saharan Africa (Table 1).

Figure 4.
Figure 4.

Output per Worker: MENA Region

Citation: IMF Staff Country Reports 2012, 120; 10.5089/9781475503845.002.A008

Source: IMF staff calculations.
Table 1.

Decomposition of Output Per Worker, Average, 1992-2008

article image
Source: Author’s calculations.

PIMI adjusted variables

Excludes oil output

8.Although physical capital accumulation explains most of the variation in output, its contribution has been small. The bottom half of Table 1 reports the standard deviation of the contribution of inputs and productivity to output—compared to education, differences in physical capital and productivity are the largest across countries. Physical capital accumulation and contribution to output has been small in MENA compared to Latin America and the Caribbean, and Europe and Central Asia, both regions have spent less but accumulated more capital stock per worker. Within MENA countries, we see that although public investment in Jordan has been higher than in other non-oil countries (such as Tunisia), it has not resulted in higher physical capital accumulation.6 Jordan spent about 4 percent of GDP for a physical capital per worker contribution of 1.2, while Tunisia spent 2.3 percent of GDP for a contribution of 1.4. A similar finding, though more pronounced, emerges with oil exporters—countries like Algeria have spent on average 12 percent of GDP for a physical capital per worker contribution of only 2.3. In part this reflects high population growth in MENA which would have required more public investment for the capital stock to increase as elsewhere, but also is an indication that high public investment spending in the region has not translated into productive capital accumulation.

9.Human capital contributions to output per worker are higher than physical capital contributions. In Jordan education contributes nearly twice as much as physical capital—reflecting increases in the years of schooling from 3 years in 1970 to 9 years by 2008. These substantial efforts to improve education are reflected in the rest of the MENA region which has seen similar increases in their educational attainment. Physical capital contributions have lagged, but not because of low public investment spending, but rather because spending has not translated into capital accumulation.

C. Policy Implications

10.From a regional perspective capital stock accumulation in MENA has come at a high cost. Public investment spending in MENA has been much higher than in other countries, but has engendered similar levels of capital accumulation and has not led to commensurate output increases. This suggests a focus on public investment with less regard to implementing policies that promote efficiency. Productivity levels are also disappointing, reflecting the variety of shocks the region has experienced, but also the need to improve the efficiency with which resources are used.

11.Increasing capital spending in Jordan could have high returns, given its relatively low stock of capital per worker and relatively efficient investment process. To benefit fully from increased capital spending, however, Jordan should look to further improve its efficiency of investment, specifically by enhancing the final stage of the investment process, that of project evaluation and appraisal.

1

Prepared by Annette Kyobe.

2

See Dabla-Norris et al. (2010). The index measures the efficiency of investment by evaluating the investment process across four consecutive stages: strategic guidance and project appraisal; project selection; project management and implementation; and project evaluation and audit. The sample includes five Middle East and North African (MENA) countries—Egypt, Jordan, Tunisia, Yemen and the West Bank and Gaza.

3

According to recent findings by IMF staff, the General Budget Department does not conduct regular ex-post evaluation of investment projects.

4

Following Pritchett (2000), the paper constructs an adjusted public capital stock series. Capital stock is calculated using the perpetual inventory method Kitp=Kit−1p−∂it*Kit−1p+pi*Iit−1, where Kitp is the stock of public capital at time t, Iit–1 is public investment spending at time t-1, ∂it is the rate of depreciation of capital stock and pi is the PIMI index, normalized from 0 to 1 which captures investment efficiency. Resulting public capital is added to private capital to yield total capital stocks.

5

The contribution of oil and gas is subtracted in calculating output for oil exporters.

6

Traditional estimates of public capital stock to GDP and PIMI adjusted capital stocks diverge, likely due to inefficiencies in public investment management in Jordan.

References

  • Barro, R. and X. Sala-i-Martin, 2004, Economic Growth, MIT Press: Cambridge, MA.

  • Dabla-Norris, E., J. Brumby, A. Kyobe, and C. Papageorgiou, 2010, “Investing in Public Efficiency,” IMF Working Paper 11/37 (Washington: International Monetary Fund).

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  • Gupta, S., A. Kangur, C. Papageorgiou, and A. Wane, 2011, “Efficiency-Adjusted Public Capital and Growth,” IMF Working Paper 11/217 (Washington: International Monetary Fund).

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  • Hall, R.E., and C.I. Jones, 1999, “Why Do Some Countries Produce So Much More Output Per Worker Than Others?,” Quarterly Journal of Economics, Vol. 114, pp. 83–116.

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  • International Monetary Fund, 2011, “Fiscal Implications of Megaprojects and Options to Improve the Fiscal Management of Public-Private Partnerships,” Fiscal Affairs Department (FAD) Technical Assistance Report.

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  • Pritchett, L., 2000, “The Tyranny of Concepts: CUDIE (Cumulated, Depreciated, Investment Effort) Is Not Capital,” Policy Research Working Paper Series, World Bank.

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Cover IMF Staff Country Reports
Jordan: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2012: Issue 120
Publisher:
International Monetary Fund
ISBN:
9781475503845
ISSN:
1934-7685
Pages:
32
DOI:
https://doi.org/10.5089/9781475503845.002

Jordan Infrastructure:

Percentile Rankings of Sub-Indicators, 2011

PIMI overall index: Decomposition by Sub-Index by Sub-Index

PIMI Index and its Subcomponents: Select Countries in MENA

Output per Worker: MENA Region