Jordan's Trade: Past Performance and Future Prospects

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<ul><li><p>Jordan's Trade: Past Performance and Future ProspectsAuthor(s): Rodney J. A. WilsonSource: International Journal of Middle East Studies, Vol. 20, No. 3 (Aug., 1988), pp. 325-344Published by: Cambridge University PressStable URL: .Accessed: 09/05/2014 12:56</p><p>Your use of the JSTOR archive indicates your acceptance of the Terms &amp; Conditions of Use, available at .</p><p> .JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact</p><p> .</p><p>Cambridge University Press is collaborating with JSTOR to digitize, preserve and extend access toInternational Journal of Middle East Studies.</p><p> </p><p>This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions</p><p></p></li><li><p>Int. J. Middle East Stud. 20 (1988), 325-344. Printed in the United States of America </p><p>Rodney J. A. Wilson </p><p>JORDAN'S TRADE: PAST PERFORMANCE AND </p><p>FUTURE PROSPECTS </p><p>Many Middle Eastern governments are seeking to liberalize their trade policies. There is a desire to abandon policies based on import substitution through protectionism, and instead concentrate on export promotion. Advisors from the World Bank and the International Monetary Fund (IMF) urge governments to be less interventionist, and to create an environment where the private sector can have freer rein. It is hoped that private entrepreneurs can revitalize the eco- nomies, and play a major role in export promotion. Egypt, for example, has had an open door policy since 1974 following the years of government intervention and control under Nasser. Syria has also liberalized its import regime, and would like to encourage private sector exports, and Ba'thist socialist ideology has been less emphasized in recent years. </p><p>The kingdom of Jordan has since 1948 pursued a trade policy that has been more liberal than that of its Arab neighbors. Tariffs have been generally low, there are few quota restrictions, and the Jordanian dinar can be converted with greater ease than the Syrian or Egyptian currencies. Government has adopted an attitude of laissez faire towards business, and the private sector has been given free rein, in contrast to neighboring Arab states where most industries are nationalized. Against this background, it is useful to evaluate Jordan's trade performance, as there are undoubtedly important lessons for other Middle Eastern countries seeking to liberalize. How have Jordan's exports, imports and the trade balance performed? Has import substitution been possible in a rela- tively unprotected environment? Have there been pressures for the government to adopt a more interventionist stance, and would this be desirable from the point of view of import curtailment and export promotion? In particular, would intervention have aided export diversification and increased export earnings, or was a neutral policy stance justifiable? </p><p>At first sight the situation appears unpromising, as the balance of trade is in chronic deficit. Since the creation of the state, imports have been well in excess of exports, which is hardly surprising in a small, largely arid country with few natural resources.1 Nevertheless, tackling the young state's enormous external payments deficit was not seen as a crucial economic policy objective, as Jordan could rely on aid inflows to ease the situation. Import-intensive capital spending programs were pushed ahead in order to help development, which was given top </p><p>? 1988 Cambridge University Press 0020-7438/88 $5.00 + .00 </p><p>This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions</p><p></p></li><li><p>326 Rodney J. A. Wilson </p><p>priority. Insofar as expenditure was limited, this was in order to control domes- tic inflation which resulted from labor shortages and other supply constraints. Domestic policy considerations were always given priority over the external payments issue. </p><p>THE DETERIORATING EXTERNAL ENVIRONMENT </p><p>Unfortunately for Jordan, external circumstances have changed considerably in recent years, and the substantial trade imbalance can no longer be ignored. Foreign aid to the kingdom halved in value in money terms over the 1980-1985 period, and in real terms the decrease was even greater. Aid from the United States, which was the largest single donor apart from Saudi Arabia in the mid- 1970s, fell sharply after 1980. There has been only modest U.S. assistance to Jordan since the Reagan Administration came to power, despite the key role which Jordan was assigned in the Reagan plan for an Arab-Israeli settlement. U.S. aid has a political price in any case, a fact of which Jordan is well aware. </p><p>In the case of the major Arab donors, the level of aid seems to be related very closely to their own economic fortunes. In 1978 aid from Arab countries to Jordan halved, reflecting the oil recession. In 1979, with further oil price in- creases, the value of Arab aid more than quadrupled in value. Since 1981, with depressed oil production levels and then disastrous price falls, Arab aid has decreased dramatically. In 1985, Kuwait's level of disbursements fell to a quarter of the level of the previous year, which represented an already depressed level. In the case of Saudi Arabia the trend was similar, though less marked. From the point of view of the Arabian Peninsula states, aid to Iraq has to be given priority over aid to Jordan with what funds are available, given the former's difficult situation because of the Gulf war. </p><p>Jordan has a large external debt burden amounting to over JD 1.1 billion (almost US $3.3 billion), although fortunately most of it was contracted at concessional rates of interest.2 Interest charges, nevertheless, amounted to almost JD 64 million in 1985, and repayments of principal over JD 75 million. If aid disbursements continue to decrease at current rates, inflows may barely cover these payments. Although borrowing from foreign commercial banks only repre- sents 37 percent of the Jordanian government's external debt, and it would be misleading to speak of a debt crisis, recent trends are clearly worrying for the authorities. There is a realization that Jordan will in the future have to rely more on its own resources, especially its human resources, which are the country's main asset. </p><p>PROSPECTS FOR REMITTANCES </p><p>Jordan has the most highly educated and best trained work force in the Arab World. Its workers have been in heavy demand in the Gulf states and Saudi Arabia. Jordanian citizens play an important role in the running of these economies, occupying key positions in government ministries and agencies, as well as in many service activities such as health and education. The benefits for </p><p>This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions</p><p></p></li><li><p>Jordan's Trade 327 </p><p>the Arabian Peninsula states of engaging Jordanian nationals have therefore been considerable, especially as there are no language barriers and the travel and displacement costs that employers have to bear are modest. The benefits to Jordan have also been appreciable over the years, despite the loss of skilled and qualified manpower, as the flow of remittances rose from JD 24 million in 1974 to JD 475 million in 1984 in current prices.3 Admittedly there were some offsetting factors, as the resulting labor shortages in Jordan itself necessitated the importation of replacement labor from Egypt and elsewhere. The remittance from Jordan amounted to almost JD 100 million in 1984. </p><p>Jordan is facing a dilemma as these offsetting remittances are continuing to rise but remittances from the Gulf are falling. This decline is partly a reflection of the current recession in the Gulf states and Saudi Arabia, but it is also a result of a deliberate policy of replacement of immigrant workers with local nationals. Local citizens in the Arabian Peninsula states are becoming increasingly well qualified themselves, and large numbers are currently entering the labor market, reflecting previous high birth rates. Young Gulf citizens are accepting positions that their fathers or elder brothers might have turned down in the past, and many of the young are resentful that foreigners, even fellow Arabs, should continue to be employed. </p><p>The value of remittances to Jordan has fallen by over one quarter since its 1984 peak, and future prospects are poor, as increasing numbers of Jordanians return home permanently. The situation might be alleviated somewhat if the returning migrants took over some of the positions occupied by immigrants in Jordan. This virtually never happens, however, as many of the foreign immi- grants work in agriculture in the Jordan valley,4 and the returned migrants have become used to working in administration and services rather than physical labor. In addition, many of the return migrants have accumulated substantial savings, and have invested in building or extending their homes in Jordan. Many go into semiretirement and hence are lost to the labor force, but continue to purchase imported goods as consumers. </p><p>CRITICAL TREND INDICATORS </p><p>Figure 1 shows four key dependency indicators for the Jordanian balance of payments: imports, exports, aid, and remittances as a percentage of gross domes- tic product. The dramatic decline in aid is evident, especially since 1981, and there is no likelihood of the situation being reversed as it was after the 1978 recession in the Arabian Peninsula. The decline in remittances is also illustrated. Remittances, however, bring drawbacks as well as advantages. Although they bring welcome injections of cash into the local economy, and have helped raise living standards, the inflows have also resulted in the Jordanian dinar being at a higher value than would otherwise have been the case. The balance of trade deficit has been offset by financial inflows, but arguably there would have been a greater possibility of exports increasing and imports being curtailed without these inflows. Remittances have helped make Jordan a high-cost environment, whereas if the exchange rate had adjusted to the underlying balance of trade </p><p>This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions</p><p></p></li><li><p>328 Rodney J. A. Wilson </p><p>% 100 - </p><p>/\ 90- / \ </p><p>/ \ / \ </p><p>80- </p><p>70 ~~~~~~- N~-oX~~~ Impor t s 70 - " </p><p>\ </p><p>60-' </p><p>\ </p><p>_SO~~~~~~~ ~~~~\ </p><p>50 - </p><p>~40 - / \~ARid </p><p>30 "'\s / _.---N Rem t tnces </p><p>10 - </p><p>0 1 1 7 . . . . t , 1. .. , 1 1976 1978 1980 1982 1984 1986 </p><p>FIGURE I. Key open economy macro indicators, where all variables are percentages of the gross domestic product. (Source: Central Bank of Jordan Monthly Bulletin of Statistics, 12.1981 and </p><p>4.1987.) </p><p>position, exports would arguably have been more competitive. If in the longer term the fall in remittances results in offsetting exports, then the Jordanian economy will become more self-reliant. </p><p>Long-run export trends have been disappointing for Jordan, although exports rose significantly in 1984 in relation to gross domestic product. Export market conditions are difficult, especially in Iraq. Private companies have achieved some export success in neighboring markets where the emphasis on developing large state sector ventures has left gaps that Jordanian businessmen have been able to exploit. Nevertheless, Jordan's export receipts cover only one quarter of import payments, which indicates the magnitude of the task facing Jordan in closing its balance of trade deficit. </p><p>The long-run fall in imports in relation to gross domestic product shown in Figure 1 is encouraging, indicating that the Jordanian economy is becoming more self-reliant at least in one respect. This has been achieved without any deliberate import substitution policy. Jordan has a liberal import system in </p><p>This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions</p><p></p></li><li><p>Jordan's Trade 329 </p><p>J 0 m I I on 1200 - </p><p>1100 - </p><p>B Exp or t s </p><p>1000 - I Imports </p><p>900 - </p><p>800 - </p><p>700 - </p><p>600 - </p><p>500 - </p><p>400 - </p><p>300 - </p><p>200 - </p><p>100 11 </p><p>0 1976 1978 1980 1982 1984 1986 </p><p>FIGURE 2. Export and import growth. (Source: Central Bank of Jordan Monthly Bulletin of Sta- tistics, 4.1987.) </p><p>contrast to other Arab countries such as Syria or Egypt. Foreign exchange permits are required for imports, but in practice these are readily available from the Central Bank. The increased self-reliance reflects to a large degree the success of Jordan's private sector businesses in supplying goods that were hitherto imported, especially processed foodstuffs and construction materials. The rapid decline in the value of imports in 1986, however, reflects government spending cuts as aid revenue has fallen. </p><p>It will be interesting to see whether the reduced role of government in the economy provides a further stimulus to the private sector. It has long been assumed in the Middle East that the prosperity of the private sector is dependent on a high level of government spending. If the Jordanian experience proves this is not the case, then it may be that crowding-out effects are more significant. In this case, a contraction in government activity may benefit private entrepreneurs, and expansion in state spending may mean few resources for the private sector. </p><p>THE TRADE DEFICIT AND THE DEMAND FOR IMPORTS </p><p>Figure 2 shows the growth of exports and imports in value terms over the 1975-1986 period. The encouraging rise in the value of exports in 1984 was </p><p>This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions</p><p></p></li><li><p>330 Rodney J. A. Wilson </p><p>TABLE 1 Elasticity of Demandfor Imports (1967-1984) </p><p>Intercept Elasticity R2 DW </p><p>Consumption expenditure -0.81 1.56 0.81 0.36 (-3.50) (8.35) </p><p>Government spending 0.71 2.80 0.91 1.32 (12.86) (12.56) </p><p>Private investment 1.04 0.93 0.98 1.32 (49.23) (30.24) </p><p>Total spending 1.62 1.56 0.91 0.34 (-7.46) (12.57) </p><p>Note: Figures in parentheses are student's t values. Regression estimated of form M = aEb where M is import value, E is spending variable, b is elasticity coefficient and a is intercept value in logarithmic transformation. As total spending is equiva- lent to to...</p></li></ul>