Jordan's Trade: Past Performance and Future Prospects

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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 12:56Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . .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 .Cambridge University Press is collaborating with JSTOR to digitize, preserve and extend access toInternational Journal of Middle East Studies. This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions J. Middle East Stud. 20 (1988), 325-344. Printed in the United States of America Rodney J. A. Wilson JORDAN'S TRADE: PAST PERFORMANCE AND FUTURE PROSPECTS 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. 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? 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 ? 1988 Cambridge University Press 0020-7438/88 $5.00 + .00 This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions Rodney J. A. Wilson 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. THE DETERIORATING EXTERNAL ENVIRONMENT 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. 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. 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. PROSPECTS FOR REMITTANCES 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 This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions's Trade 327 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. 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. 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. CRITICAL TREND INDICATORS 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 This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions Rodney J. A. Wilson % 100 - /\ 90- / \ / \ / \ 80- 70 ~~~~~~- N~-oX~~~ Impor t s 70 - " \ 60-' \ _SO~~~~~~~ ~~~~\ 50 - ~40 - / \~ARid 30 "'\s / _.---N Rem t tnces 10 - 0 1 1 7 . . . . t , 1. .. , 1 1976 1978 1980 1982 1984 1986 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 4.1987.) 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. 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. 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 This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions's Trade 329 J 0 m I I on 1200 - 1100 - B Exp or t s 1000 - I Imports 900 - 800 - 700 - 600 - 500 - 400 - 300 - 200 - 100 11 0 1976 1978 1980 1982 1984 1986 FIGURE 2. Export and import growth. (Source: Central Bank of Jordan Monthly Bulletin of Sta- tistics, 4.1987.) 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. 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. THE TRADE DEFICIT AND THE DEMAND FOR IMPORTS 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 This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions Rodney J. A. Wilson TABLE 1 Elasticity of Demandfor Imports (1967-1984) Intercept Elasticity R2 DW Consumption expenditure -0.81 1.56 0.81 0.36 (-3.50) (8.35) Government spending 0.71 2.80 0.91 1.32 (12.86) (12.56) Private investment 1.04 0.93 0.98 1.32 (49.23) (30.24) Total spending 1.62 1.56 0.91 0.34 (-7.46) (12.57) 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 total income, 1.56 can be interpreted as the income elasticity of demand for imports for Jordan. Sources: Central Bank of Jordan Monthly Statistical Bulletins, 8, 3 (March 1972), Table 32; 12, 12 (December 1976), Table 41; 17, 12 (December 1981), Table 42; 21, 12 (December 1985), Table 43. largely reflected in volume terms, with some levelling off in 1985-1986. The trade deficit remains enormous, however, and it is clearly a long-term task to narrow it, rather than an objective that can be achieved in the short run. The figures in the chart are in terms of current prices, but inflation has been modest in recent years, although price increases may have caused some distortions in the late 1970s. Although the value and the volume of imports increased rapidly over the 1979-1981 period, the value of imports has fallen from its 1982 peak. This trend is encouraging for the balance of trade, although the decline in imports in recent years to some extent reflects falling investment expenditure. If investment cannot be encouraged, Jordan's economic growth will inevitably suffer in the long run. One challenge for Jordan's planners in the current climate is to identify areas where there is good growth potential with low import-intensive capital invest- ment. It seems likely that such areas will be found in the services field, especially those attractive to local, highly educated labor, rather than in manufacturing industry.5 Encouragingly, imports appear to be much less responsive to private invest- ment expenditure than to government spending. Table 1 shows the elasticities of demand for imports with respect to the three major macro expenditure cate- gories over the period since 1967, when the West Bank was occupied by Israel. The level of government expenditure is revealed to be a major determinant of imports, but the overall income elasticity of demand for imports is not high for a country of Jordan's size or level of development. If economic growth can be encouraged by private sector initiatives, import demand can be held in check. This may be partly because private investment, with its relatively greater wage bill, involves fewer direct foreign exchange costs. It may also reflect the fact that small scale private investments involve domestic construction companies, using This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions's Trade 331 TABLE 2 Export Price Elasticities (1975-1984) Price elasticity Goodness of fit Durbin Watson Deviations (b) t value (R2) Statistic from trend Overall 0.34 4.27 0.70 0.80 0.72 Food 0.59 4.27 0.69 1.23 2.21 Raw materials 0.16 0.97 0.10 0.72 4.36 Chemicals 0.34 4.07 0.67 1.85 3.60 Manufactured goods (1) 0.41 0.41 0.21 1.40 2.66 Manufactured goods (2) 0.77 3.51 0.61 2.01 5.87 Note: Regression estimated of form X = pb, which was transformed logarithmically into log X = a + b log P. X is export volume, P is the export price, a is the intercept parameter in logarithmic form and b is the slope parameter (price elasticity). Manufactured goods by material is category (1) and miscellaneous manufactured goods is category (2). The deviation from the trend is the average deviation of the actual observation from the value estimated from a linear trend. It is expressed in percentage form. Sources: Central Bank of Jordan Monthly Statistical Bulletins, 17, 12 (December 1981), Table 32, and 21, 12 (December 1985), Table 34. locally available building materials rather than imported, high-value plant and equipment. EXPORT PRICING PROBLEMS Jordan, like many other developing countries that export minerals, faces export pricing problems. Export prices have tended to decline in the long run vis-a-vis the prices of imported goods, and they have also tended to fluctuate considerably from year to year. Historically this has reflected Jordan's depen- dence on commodities such as phosphates, the price of which has been notori- ously unstable in international markets. Phosphate rock, usually exported in crudely ground form, is Jordan's major export. It accounted for around one- third of total export proceeds in the early 1980s. Since then, the establishment of the kingdom's own fertilizer industry has resulted in the share of crude phos- phates falling to just over one-quarter, while fertilizer manufactured from phosphate accounts for one-sixth. Unfortunately, Jordan is not a large enough producer of phosphates to have an impact on world market prices. There is a market-sharing agreement with Morocco, the other major Arab exporter of phosphates, but this has little impact.6 Morocco has not adhered to the agreement as it has sold phosphates in some of Jordan's traditional Southeast Asian markets, undercutting Jordanian prices. Attempts to implement the agreement with Morocco have so far failed: Morocco paid lip service to the agreement, but in practice acted unilaterally. Arab solidarity does not seem to be an important consideration as far as Morocco is concerned. Jordan has therefore sought to establish its own fertilizer exports, not only to secure greater domestic value added, but also because fertilizer prices are more stable in international markets than those for crude phosphates. Table 2 shows This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions Rodney J. A. Wilson the price elasticities of supply for Jordan's exports by major category, as well as price deviations from a long-run linear trend. A low price elasticity value indicates that supply is relatively unresponsive to changes in price, as with phosphates. Exports cannot be easily curtailed when prices are low or expanded when prices are high, as production decisions are made well in advance. With exports of manufactured goods, and even foodstuffs, much greater supply flexibility is evident, with higher elasticity values. The chemical goods category includes fertilizers, which have a much higher price elasticity than crude phosphates. Not only have price trends been more encouraging for fertilizers, manu- factured goods, and even foodstuffs than they are for raw materials, but price fluctuation seems to be smaller. Only in the case of the small, miscellaneous manufactured goods category are price fluctuations greater than for raw mate- rials, as the last column of Table 2 indicates. Prices of foodstuffs and manufac- tured goods classified by material are relatively stable, although, of course, overall export prices are the most stable, as some fluctuations tend to cancel others out. THE TERMS OF TRADE Of even greater interest than export prices alone is the overall performance of the terms of trade, as this indicates the country's capacity to import.7 Figure 3 reveals how the prices of Jordan's exports have risen in relation to import prices over the 1973-1986 period. When the export price schedule is above the import price schedule this indicates a favorable terms of trade situation. This seems to have been the case over most of the period except for 1980-1982, when the prices of Jordan's phosphate and potash exports were falling in relation to the prices of imports of manufactured goods from the West and petroleum products from Jordan's Arab neighbors. Of more crucial importance are the relative slopes of the two schedules. When the export price line is steeper than the import price line, this indicates a terms of trade improvement; where the dotted line is steeper, this means a deterioration. Over the 1979-1981 period, for example, the terms of trade situation was deteriorating, due partly to the rising price of oil imports. There was an improvement in 1982, and again in 1984 and 1986. In 1983 and 1985, with both export and import prices declining to the same degree, there was no change in the terms of trade. Import prices can rise rapidly if currencies depreciate. In the case of the Jordanian dinar, however, this has not been the case, as the currency is pegged to the Special Drawing Right, the International Monetary Fund's global unit of account, and there have been no currency adjustments in recent years. The authorities have monitored external payments closely through the foreign ex- change licensing system. Maintaining confidence in the dinar has been a key policy objective, not least because of the need to attract remittances into dinars. The rises in import prices therefore have largely reflected domestic inflation in the import-supplying countries, over which Jordan can have no control. As the Amman authorities could have little effect on either import prices or most export This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions's Trade 333 130 -1 = 1 UU 120 - / 110- 100 - / 90- \\ | / v^ _ Import Prices 70 - / 60 - / 50 -/ 40 - 30 i 1973 1975 1977 1979 1981 1983 1985 FIGURE 3. Export and import price indices. (Source: Central Bank of Jordan Monthly Bulletin of Statistics, 4.1987.) prices, the terms of trade have largely had to be accepted as a policy constraint rather than a factor that could be influenced by policy decisions. Future prospects for import prices are reasonably encouraging, as inflation has fallen to its lowest rates since the 1960s in the major countries that supply Jordan with capital and consumer goods. In addition, the fall in oil prices of 1985-1986 benefited Jordan as an oil importer. Although initially after the 1974 oil price rises, Jordan was supplied with some oil at concessionary prices well below those charged to Western customers, this concession was withdrawn due to the difficulty in preventing re-exports. For over a decade Jordan has been paying the full market price, so the price falls are at least compensating the kingdom for some of the loss of financial aid from oil-exporting countries of the Arabian Peninsula. TRADE COMPOSITION Predicting future terms of trade movements depends, of course, on export price developments as well as import prices. It is the former that are especially difficult to assess in Jordan's case. Nevertheless, crucial determining factors are I aon- I nn This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions Rodney J. A. Wilson Imports Expor t s 1374 26_.__f 4/ 4 . .1974 2 =5. 6%- Co1986 38.Goos Consumer Goods If Cop tol Goods j Row Moaterials (I Other EE} FIGURE 4. Trade composition. (Source: Central Bank of Jordan Monthly Bulletin of Statistics, 9.1986.) the types of goods being exported and the markets in which they are sold. The question of trade composition and the direction of trade are therefore worth examining in some detail. Figure 4 shows how Jordan's composition of both exports and imports has changed over the 1974-1986 period. Classification, of course, raises many problems, especially deciding what constitutes consumer and capital goods. A private car imported into Jordan is regarded as a consumer good, but a taxi is classified as a capital good, even though the taxi driver may use the vehicle for his family's private use for part of the time. Phosphates exports are, of course, classified as raw materials, but phosphate fertilizers that are domestically manu- factured are regarded as consumer goods. This may be misleading, as farmers may regard their fertilizer purchases as a capital investment, a productive input rather than a final output. The change in import composition is fairly unremarkable, as the rise in the share of raw materials largely reflects the increased payments for petroleum, which Jordan was able to obtain at concessionary prices in 1974 as already indicated. The other goods category fell simply because the customs became This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions's Trade 335 more practiced at classifying goods. Of greater interest is the change in export composition, especially the decline in the share of raw materials and the substantial increase in the share of consumer goods to almost three-fifths of the total. Apart from fertilizers, which as already indicated may be regarded as misclassified, Jordan has been successful in establishing a range of chemical and light consumer goods industries, mainly providing supplies for the construction industry or domestic households. Examples of chemical exports include paints, pharmaceutical products, detergents and soap. A significant furniture manufac- turing industry has been established, largely using imported wood, and house- hold furniture as well as joinery supplies are exported despite the lack of domestic timber. Food processing is becoming more important, and Jordan exports a large number of cigarettes to the Arabian Peninsula states. These trends are encouraging, as the prices of consumer goods exports tend to be more stable than those of primary products, and the increasingly diversified nature of Jordan's exports further reduces vulnerability. These exports make good use of Jordan's skilled laborers, such as joiners and carpenters. Amman has become a kind of workshop for the Arab Middle East that would not have been considered feasible two or even three decades ago. Most of the exports of manufactured goods have been the result of private Jordanian initiatives, and they demonstrate how Jordan is one center where entrepreneurship is flourishing in the otherwise often-inhibited environment of the Arab Middle East. All too often state policies have impeded rather than encouraged enterprise elsewhere in the region, although admittedly the climate has started to change, even in neighboring Syria. DIRECTION OF TRADE Not surprisingly, most of Jordan's imports originate in the developed coun- tries comprising the Organisation of Economic Cooperation and Development (OECD). There has been some substitution of suppliers, with major European Community exporters such as the United Kingdom, West Germany and Italy becoming displaced by Japan, which has become the largest single source of Jordan's imports. The overall share of the OECD countries as import supplies increased over the 1974-1986 period, to some extent at the expense of the socialist states of Eastern Europe, as Figure 5 shows. The share of Asian suppliers fell: this category excludes Japan and the Arab states, which are classified separately. As imports from Korea, Taiwan, Hong Kong, and China increased rapidly, the fall in Asia's share mainly affected imports from India, Pakistan, and Iran. The increase in Arab imports largely reflects the rising value of petroleum purchases, as Jordan consumes more petroleum today than in 1974. The recent oil price falls reduced the share of Arab imports by 4 percent over the 1984-1986 period. Although most Jordanian imports originate in the developed countries, the Third World represents the kingdom's main export market. The Arab countries of the Arabian Peninsula and Iraq account for almost half of Jordanian exports, excluding re-exports through the port of Aqaba. The fruit and vegetables grown This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions Rodney J. A. Wilson Impor ts Expor ts 1974 1986.) .tz. useful foreign exchange for Jordan.8 Even though market conditions in the Gulf states are currently depressed, this is unlikely to have much impact on the market is South Asia, where, because of large agricultural sectors, the markets greater challenge, as India and Pakistan have established fertilizer industries themselves. There is also some competition from the Gulf fertilizer industry, especially the Saudi plant at Jubail, which ironically uses Jordanian phosphate Ararb i ag a Asia etoh OECDEE] Socil stom FIGURE 5. Direction of trade. (Source: Central Bank of Jordan Monthly Bulletin of Statistics, 9. 1986.) in the Jordan Valley under irrigation are largely marketed in the Gulf, and earn usefulrock. Jordan has the advantage of an indigenous raw materia source, but the Gulf Gulf states have currently depressed, this is unlikely to have much impact on theks. Jordan is a member of the Arab Commordanian sales of fruit and vegetablished in unlike1964. Other members incluthe ded Sypressed to join, Some crude phosphate and fertilizers are sold in the Gulf, but Jordan's major market is South Asia, where, because of large agricultural sectors, the markets for phosphate and fertilizers are much greater. Sales of crude phosphates present few problems apart from the question of pricing, but marketing fertilizers is a greater challenge, as India and Pakistan have established fertilizer industries themselves. There is also some competition from the Gulf fertilizer industry, especially the Saudi plant at Jubail, which ironically uses Jordanian phosphate rock. Jordan has the advantage of an indigenous raw material source, but the Gulf states have lower-cost energy feedstocks. Jordan is a member of the Arab Common Market, which was established in 1964. Other members included Syria, Egypt, and Iraq. Kuwait agreed to join, This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions's Trade 337 but its parliament refused to ratify the treaty as it was feared that Kuwait might be forced to buy second-rate consumer goods from Egypt rather than high- quality far Eastern supplies. The fact that the Arabian Peninsula states excluded themselves from the Arab Common Market was unfortunate for Jordan given its export orientation, although in practice no tariffs are applied to agricultural produce from the Jordan Valley. Nevertheless, now that the Gulf states have their own economic forum, the Gulf Cooperation Council (GCC), from which Jordan is, because of its location, excluded, there is some worry that the kingdom will be at a disadvantage. The main gain from the elimination of tariffs within the Arab Common Market has been in Jordan's trade with Iraq, but the latter is a less important market than the Arabian Peninsula states at present. TRADE WITH IRAQ Arguably, because of its geographical proximity, population size and eco- nomic potential, Iraq should constitute Jordan's major natural trading partner. In fact, prior to the Gulf War, trade with Iraq was growing substantially, with Iraq supplying oil while Jordan sold a range of private sector light manufactured goods which Iraq's state-run industries did not provide. These included pharma- ceutical goods, detergents and soap, as well as some household durables. Al- though the Gulf War did not initially affect Jordan's export sales to Iraq, the level of these sales has been erratic since then, especially in 1983 when severe foreign exchange shortages curtailed Iraqi purchases. Although there is free trade between Jordan and Iraq, payment restrictions remain as neither currency is convertible. This constitutes a major impediment to trade, but it seems unlikely that either country will relax its foreign exchange restrictions even if conditions improve. The Gulf War has resulted in Iraq having to divert all of its trade away from Basra, relying instead on Aqaba as a major transhipment port for imports. Figure 6 indicates the extent of the transit trade for containers. Jordan has benefited significantly from this transit trade, although trucks using the route from Aqaba to the Iraqi frontier have taken a heavy toll on the kingdom's roads. Nevertheless, the handling fees and employment generated in the port of Aqaba have been useful, and Jordanian transportation companies have gained profit- able business. Transit trade is nevertheless a poor substitute for domestic exports. The value of Jordan's exports to Iraq was almost JD 68 million in 1984, a figure that seems likely to be sustained in 1985. This was a large improvement over the JD 26 million level of 1983. However, an export target of JD 100 million for trade with Iraq appears both feasible and realistic. Jordan has to run a substantial trade surplus with neighboring states such as Iraq if it is to pay for its imports from the OECD states. Whether such surpluses will be economically and politically acceptable to Jordan's neighbors is, of course, a debatable point. Nevertheless, such trade imbalances are merely in- tended to offset the loss of aid and remittances. It is this point that Jordan's planners will need to emphasize in Arab and other forums; otherwise, any strategy of increasing self-reliance in trade will simply not be feasible. This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions Rodney J. A. Wilson Thou sand Con tao ners 40 - 35 - 30 5 ___ 25 20 ~ --- _ _ _ _ _ _ o ^~~ 1982 1983 1984 1985 1986 FIGURE 6. Transit trade through 12.1983 and 12.1986.) Aqaba. (Source: Ports Corporation Aqaba Monthly Statistics, COUNTERTRADING PRACTICE The Jordanian government would like to diversify the composition of the kingdom's exports and increase the number of export markets. Hard currency is needed to finance the country's imports from the European Community, but this cannot easily be obtained merely by trading with Arab and other Third World states. Much of Jordan's export trade is conducted on a countertrading basis, through various bilateral deals with major regional and less-developed trading partners.9 Jordan's exports of plastic products to Iraq, for example, are ex- changed for oil, as the Baghdad authorities lack foreign exchange to pay for their imports. Jordan already has an agreement with Saudi Arabia to take oil from the Tapline, which cannot be conveyed to the Lebanese coast,10 so it does not particularly need the Iraqi oil. To refuse to participate in such barter, however, would only result in the virtual cessation of trade with Iraq, with adverse consequences for Jordan's export businesses and domestic employment. The oil price falls have complicated the position further, as Jordan should be entitled to more oil from Iraq for its exports. Nevertheless, Jordan does not want additional oil, as it cannot re-export these supplies easily-exports cannot be sent through Israel, and it is costly to transport oil to Aqaba for shipment or send it through Syria. B Jordon * Iroq This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions's Trade 339 Of course the oil price reductions have brought benefits to Jordan as an oil importing nation. The oil import bill declined by JD 12 million in 1985 com- pared to 1984, a saving of 6 percent, and in 1986 a 30 percent reduction occurred, a saving of almost JD 40 million. In the context of barter trade these figures don't, however, mean much. Jordan's exports to Iraq have declined by a similar amount, resulting in minimal balance of payments gains. The cheaper oil prices do of course lower inflation and make industries such as plastics more competitive, but this does not aid exports, which are rather price-insensitive as already observed. In addition, the oil price reductions reduce the incentive to develop Jordan's own oil shale deposits, although these are of doubtful viability in any case. The solar energy program is also threatened, but 90,000 locally assembled units to provide domestic hot water are already in place. Phosphate and fertilizer sales are also often conducted on a barter basis. India provides textiles or capital items such as industrial equipment in exchange for these supplies. Some of this trade is useful, with India, for example, providing equipment for the Aqaba railway and even an engine repair workshop. However, many of the bartered goods are not needed, but only accepted in the interest of export promotion. Countertrading is often conducted on a package basis. Either the whole deal is agreed to, or no trade takes place. In order to obtain items that are required, unwanted goods have to be accepted. Jordanian exporters urge the authorities to accept such goods, otherwise they will lose their contracts. Countertrading involves considerable cost. Jordanian middlemen must fre- quently arrange re-export of those bartered goods which are surplus to Jordanian requirements, often at considerable discounts compared to the prices which the Indians consider the goods are worth. The Indians are therefore pressed to supply more, but this often merely adds to the Jordanian middlemen's marketing problems. Clearly trade on a cash basis is preferable to these arrangements, but countries in this position often may not purchase Jordanian goods as a first choice. TRADE ORIENTATION AND COMPARATIVE COSTS Jordan has a cooperation agreement with the European Community, which is being renegotiated in 1987 as part of the talks instigated by Claude Cheysson as a result of the accession of Spain and Portugal to the Community. Jordan has yet to formulate its negotiating position for these talks and specify the range of products on which concessions will be sought from the European Community. Crown Prince Hasan talks of harnessing Jordan's undoubtedly well-educated middle-class citizens to produce high technology goods for export, but the potential for Jordan to compete in the European Community market for high technology products such as computer software seems limited. Technical training is deficient in Jordan; less than 10 percent of graduates have degrees in engineering and other technical subjects. Jordan can certainly serve the regional Arab market, and it may have a comparative advantage in this context. At present, however, most Jordanian manufactured exports are basic, low technology goods, such as plastic products, tried and tested medicines, household furniture and a range of other basic This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions Rodney J. A. Wilson consumer items from soap to glassware. Jordan's problem is that Saudi Arabia is developing a similar range of industries on a highly subsidized basis through cheap credit, which Jordan cannot afford. Saudi Arabia seems destined to become the main manufacturing base for the GCC states, a process that the Jordanian government can only observe from the sidelines. Yet Jordan is a high-cost country by Third World standards, and the government is reluctant to try to gain short-term competitive advantages through devaluation or depreciation of the dinar. This would only raise the cost of imports, fuel inflation, and result in a loss of confidence in Amman as a financial and service center. Amman gained some of Beirut's financial business during the Lebanese Civil War, and there is a desire to preserve these gains. With devalua- tion, remittances might fall even faster, as those workers remaining in Saudi Arabia and the Gulf delayed conversion of funds in anticipation of further devaluations. This has been the Egyptian and Turkish experience. It is even doubtful if devaluation would stimulate exports. The low elasticity values shown in Table 2 indicate that the demand for Jordan's exports may be unresponsive to any reductions in price. It is only in a few cases that pricing factors may be significant. With potash from the Dead Sea, Jordan's second major mineral export, pricing is a problem. Israel has cut its price to $40 a ton, and gained most of the market. Jordan needs a price of $65 a ton to make its production viable, given its higher domestic cost structures and lower productivity levels. Obviously costs could be reduced in foreign currency terms by devaluation. Whether such an exchange rate realign- ment would be justified in view of the adverse consequences on most other counts must, however, be debated. GOVERNMENT INTERVENTION The kingdom lacks a trade strategy, and therefore any means of cutting the trade gap. Imports can and already have been cut, but this only harms long-term development as far as capital goods are concerned. The authorities are in any case unwilling to discriminate in favor of capital goods, and curtail consumer goods. Such austerity measures would be domestically unpopular, and create distortions which the free-market-minded government is reluctant to contem- plate. Foreign exchange is still more or less freely available for imports, and the central bank takes a relaxed attitude, despite Jordan's falling level of reserves. Some domestic manufacturers feel that the Jordanian government does not provide sufficient protection for local industry." Furniture producers, for exam- ple, have been adversely affected by a large increase in imports from Italy, which have driven some producers out of business and caused others to cut down on production, with adverse consequences for employment in this labor-intensive industry. The Italian furniture is usually more expensive than competing Jor- danian products, and often made from inferior materials with veneers rather than solid timbers widely used. Jordanian purchasers often prefer to purchase imports, however, simply because it is fashionable to do so or because foreign goods are perceived as more modern. It is difficult for local manufacturers to This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions's Trade 341 counter such public attitudes, but many feel it is up to government to take a lead. The importation of Italian stone for building luxury homes in Amman seems particularly wasteful in terms of foreign exchange, given the abundant local availability of good-quality stone materials. Yet, of course, measures to halt such imports might invite retaliation. In a free enterprise environment such as Jordan it can be argued that local entrepreneurs should be able to take up the challenge and provide import substitutes. Rather than lobby the government to restrict imports, they should act positively and provide competitive goods themselves. If importers develop a new market, this creates an opportunity for domestic manufacturers to exploit. Meeting this challenge in Jordan is far from easy in practice. First, the small size of the domestic market makes it difficult to justify substantial investment in new product lines or improved production techniques. Second, economies of scale cannot be realized with limited production runs, which implies uncompetitive- ness and high overheads in relation to sales. Third, because of Jordan's family business structure, the heads of enterprises are often elderly and conservative in outlook. Sons working in the business may often be better trained and educated and have innovative ideas, but they may have difficulty in getting these ideas accepted. In Jordan, market failure often occurs not because of information deficiency, but because those who are aware of opportunities lack the authority to act.'2 To a greater extent in Jordan than elsewhere in the Middle East, it is the market that has determined the composition but not the direction of trade. The prevalence of countertrading among the kingdom's trading partners has neces- sitated government playing an active role in trade negotiations. The government has not attempted to determine import priorities, however, or evolve an export policy. The kingdom's development plans have little to say about the composi- tion of imports, and there has been no attempt to rank the purposes for which foreign exchange earnings should be used. Yet much of the aid from the Arab oil producing states was untied, and there has been little pressure for the kingdom to purchase imports from particular sources except in the interest of export promotion. Clearly the Jordanian authorities had much freedom to reach their own policy decisions, but they chose not to use it. It can be argued that imports of investment items are preferable to consumer goods, for example, from the developmental point of view. Yet there has been no attempt to adopt discriminatory policies. Of course those against government intervention could argue against such policies. Whether Jordan's manufacturing capacity would have expanded more rapidly with a greater degree of protection must be a matter for debate. Plants making pharmaceutical products, plastic items, construction materials, detergents and processed foodstuffs are arguably more competitive than they would be if they enjoyed a monopoly of the local market because of quota protection. Such goods may not have been exported to Iraq if they were too uncompetitive compared to rival Western products. On the other hand, the cost of producing such goods might have been lower if the equipment used to produce them had been imported at a preferential exchange rate. This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions Rodney J. A. Wilson Import policy has often been concerned with peripheral issues, which have limited development impact. The creation of the free zones at Aqaba and Zarqa, for example, received much attention, with raw materials allowed in duty-free as long as they were used for export goods. No export industries have been established in the zones, however, with the Aqaba zone providing duty-free facilities for transit trade only, and Zarqa providing similar facilities for long- distance truck drivers en route to Syria and Iraq. In practice, unofficial duty-free zones are more significant. Large quantities of consumer electrical goods are smuggled into the town of Muwaqqar, for example, from Saudi Arabia, and resold illegally to Jordanian purchasers who seek to avoid paying import duties. This trade is said to be the chief source of income for the inhabitants of Muwaqqar.3 The major motive for import duties in Jordan is to raise tax revenue. This is a more important objective than foreign exchange saving or infant industry pro- tection. Import duties account for almost 50 percent of indirect taxes, and one- third of total tax revenue. Where exemptions are permitted, this is usually because of a government obsession with technology rather than to help domestic industry. Computers and other items of office equipment can be imported tax free, as it is thought this will help make Jordan a high technology society. The financial services sector, the main user of such goods, is arguably overdeveloped for Jordan's needs and the limited regional financial role that the kingdom plays. Meanwhile, imports of heavy goods vehicles are subject to high taxes. As a consequence, some Jordanian haulers register their vehicles in Saudi Arabia or the Gulf states, but in practice these vehicles are used on Jordan's roads for domestic as well as transit trade. EXPORT PROMOTION MEASURES If the government is reluctant to act on imports, it is argued that they should at least create an institutional framework to aid exports. Over one-third of bank credit goes directly and indirectly into financing imports, yet the proportion used to finance exports is negligible. The creation of an export bank is one possibility, although the government is reluctant to see a proliferation of state-controlled financial institutions, and lacks funds to start such a bank in any case.14 An export promotion organization has also been suggested, which could identify market opportunities and advise Jordanian companies how to take advantage of them. Once again there is a suspicion that such an organization might be unwelcome to the business community, as a type of unwanted state interference. There is the belief that businessmen know best what opportunities exist, al- though it can be argued that most Jordanian companies are too small to take export initiatives. Another idea is to establish an Export Credit Guarantees Department to protect Jordan's exporters from the risk of payments default. It is argued that banks are reluctant to finance exports because of the uncertainty involved, but if an insurance scheme were introduced to compensate exporters in the event of payments default, the banks would be more willing creditors. Clearly, political This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions's Trade 343 risk has to be separated from commercial risk. Both concern exporters, but they cannot do much about the former. In Jordan's case, with most exports going to countries with a long record of defaults, it is argued that insurance would be too costly to provide. Clearly there are no easy options, and even the creation of an appropriate institutional framework to encourage exports may be far from easy. CONCLUSION Overall it seems clear that the liberal economic climate in Jordan and the lack of government intervention have brought some economic success. The private sector produces a growing range of goods for the local market, and imports have declined in relation to gross domestic product even though there has been no official policy of import substitution. The low elasticity of demand for imports associated with private investment compared to government expenditure indi- cates that the reallocation of resources to the private sector can result in signifi- cant import saving. Private sector manufactured exports have penetrated neighboring markets, especially Iraq, and the share of raw material exports has decreased. Neverthe- less, private entrepreneurs have not taken advantage of all their opportunities, and a case can be argued for selective government intervention. More rationali- zation may be needed in the private sector to create larger enterprises with better marketing capability. In a small state such as Jordan this can easily be accom- plished by a greater dialogue between government and the private sector rather than through state ownership. CENTER FOR MIDDLE EASTERN AND ISLAMIC STUDIES UNIVERSITY OF DURHAM, ENGLAND NOTES Author's note: Much of the material for the later policy sections of this article was collected during a study visit to Jordan during September-October 1986. A preliminary draft of the article was prepared in the spring of 1986, and sent to several economists in Jordan prior to this visit. Their comments and suggestions were extremely valuable. The author would like to thank in particular Dr. Monther Share of Yarmouk University, Dr. Haitham El Hurani of the University of Jordan, Dr. Muhamad Amerah of the Royal Scientific Society in Amman, and Salim Abu Shaar of the Central Bank of Jordan (on secondment to the Ministry of Energy and Mineral Resources). The author, of course, bears sole responsibility for the contents of this article. 'For background information on Jordan's economy see Michael P. Mazur, Economic Growth and Development in Jordan (London, 1979). For a brief account see Rodney Wilson, The Economies of the Middle East (London, 1979), Ch. 10. 2Central Bank of Jordan, Monthly Statistical Bulletin, 23, 4 (April, 1987), Table 32. 3Central Bank of Jordan, Monthly Statistical Bulletin, 21, 12 (December, 1985), Table 25. Official remittance figures exclude foreign currency brought back into Jordan and converted into dinars through money changers. It also excludes remittances in kind, as Jordanian expatriates often bring home as personal imports items such as cars, and are free to re-sell them. These items may add an estimated 60 percent to the value of remittances to the Jordanian economy, but these unofficial remittances have also slumped. This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions Rodney J. A. Wilson 4The large agricultural development schemes in the Jordan Valley were financed through aid. Though technically successful, the output is costly, and cannot be profitably marketed at world prices. 5Such activities include banking and financial services. 6These problems are discussed in a monograph the author has prepared on Euro-Arab Trade (London, 1988). 7This is sometimes referred to as the income terms of trade. 8The development of agricultural exports into a significant source of foreign exchange earnings has been a remarkable achievement. For details see Rami G. Khouri, The Jordan Valley (London, 1981). Another useful book on Jordan's agriculture is A. B. Zahlan, ed., Agricultural Sector of Jordan: Policy Systems Studies (London, 1985). 9An excellent guide to countertrade techniques is Steven M. Rubin, The Business Manager's Guide to Barter, Offset and Countertrade (London, 1986). 'tTapline, which flows under the Golan heights, was closed after the Israeli occupation of 1967. There were some discussions concerning its reopening, but the Lebanese Civil War and the strife in Sidon near the terminal location brought these discussions to an end. "Monther Share, "Jordan's Trade and Balance of Payments Problems," paper presented to the conference on "Politics and the Economy in Jordan" held in London on 19 May 1987. The paper is being included in the proceedings of the conference being edited by Rodney Wilson, to be published in London by Croom Helm in 1988. 12Zayd Sha'sha, "The Role of the Private Sector in Jordan's Economy," paper presented at the conference in "Politics and the Economy in Jordan" which will also be included in the Croom Helm book (see note 11). "3Information reported to the author during a field visit to the town, and confirmed by several official sources that cannot be quoted. 14Egypt has such an institution. See Rodney Wilson, "Egypt's Exports: Supply Constraints and Marketing Problems," British Societyfor Middle Eastern Studies, 12, 2 (1985), 135-56. This content downloaded from on Fri, 9 May 2014 12:56:01 PMAll use subject to JSTOR Terms and Conditions Contentsp.[325]p.326p.327p.328p.329p.330p.331p.332p.333p.334p.335p.336p.337p.338p.339p.340p.341p.342p.343p.344Issue Table of ContentsInternational Journal of Middle East Studies, Vol. 20, No. 3 (Aug., 1988), pp. 265-410Front Matter [pp.286-302]British Policy toward Egyptian Labor Activism, 1882-1936 [pp.265-285]The Present Day Status of Small-Scale Industries (Sanatkar) in Bursa, Turkey [pp.287-301]Radical Politics and the Syrian Social Nationalist Party [pp.303-324]Jordan's Trade: Past Performance and Future Prospects [pp.325-344]The Modes of Production Approach to Seventeenth-Century Iran [pp.345-363]Fiscal and Monetary Systems in the Mahdist Sudan, 1881-1898 [pp.365-385]Book Reviewsuntitled [pp.387-388]untitled [pp.389-390]untitled [pp.390-393]untitled [pp.393-394]untitled [pp.394-397]untitled [p.397]untitled [pp.398-399]untitled [pp.399-400]untitled [pp.400-401]untitled [pp.401-403]untitled [pp.403-404]untitled [pp.405-406]Notes and Comments"An Eighteenth-Century Turkish Intelligence Report" [p.407]Correction: "Study of Middle Eastern Women: Investments, Passions, and Problems" [p.408]"The Study of Middle Eastern Women: Investments, Passions and Problems" [p.408]Tribalism and Society in Islamic Iran, 1500-1629 [pp.408-410]Tribalism and Society in Islamic Iran, 1500-1620 [p.410]Back Matter


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