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Jordan - The Economy Role of the Government
Role of the government
In the late 1980s, the government of Jordan remained a staunch advocate of free enterprise. Unlike many of its Arab neighbors, and for both pragmatic and ideological reasons, Jordan had never nationalized businesses, seized private assets without compensation, or implemented socialism. But although the economic system was as liberal and market oriented as those of many fully developed nations, the government continued to play a large economic role, both in development planning and as a financier.
A Mixed Economy
Government encroachment on the economy in the form of ownership or equity participation in corporations was inevitable and, to some extent, inadvertent. The government's role as financier derived from several interrelated factors. Most important, the government was the only channel through which foreign aid, loans, and most expatriate worker remittances were funneled into the country. Acting as an intermediary in the distribution of these funds, the government acquired a reputation in the private sector for its "deep pockets" and fostered in the business world a feeling of entitlement to government support in the capitalization of certain enterprises. Inadequate private capital investment, resulting in part from an entrenched "merchant mentality," has been a weak point in the economy for which the government has had to compensate. Moreover, the large amount of capital investment required by some extractive industries was beyond the reach of willing private sector investors. In some industries, such as telecommunications, government ownership was viewed simply as a prerogative. In numerous other cases, the government felt compelled to bolster private investor confidence and so stepped in to rescue insolvent private sector companies and banks with an infusion of capital, to buy the receivables of exporting companies unable to collect payment from foreign customers, and, when publicly held companies went bankrupt, to compensate shareholders for the lost value of their stocks. In this manner, the government essentially adopted companies that were abandoned by the private sector.
Eventually, the government came to preside over a large mixed economy of some forty semipublic corporations. The government's share of the combined nominal equity of these companies was about 18 percent, but its share of their combined paid-up capital--a more realistic measure of ownership--was over 40 percent. The government had contributed 100 percent of the paid-up capital of eleven of the companies, although its share of their nominal capital was much lower. These firms included Arab International Hotels, the Arab Company for Maritime Transport, the Jordan Cement Factories Company, the Arab Investment Company, and a number of joint ventures with Iraq and Syria. In six of the companies, the government was a minor investor, holding less than 10 percent of the equity. The largest company in this group was the Jordan Refinery Company, in which the government held only a 3 percent share. This group also included the Arab Pharmaceutical Manfacturing Company and the Jordan Ceramic Company. Public investment tended to be highest in those companies with strong domestic and export markets. In 1988 the government was pursuing plans to offer the government-owned telecommunications industry and the national air carrier, Royal Jordanian Airlines, for sale to a combination of Jordanian and other Arab private sector investors.
Clearly, the government assumed responsibility for some aspects of the economy by default because of lack of investment activity and initiative in the private sector. Although total gross fixed capital formation was targeted by the 1980-85 Five-Year Plan for Economic and Social Development (known as the 1980-85 Five-Year Plan) to grow at about 12 percent annually, it grew at less than 1 percent per year. Public sector capital investment during the period totaled almost JD60 million, 40 percent more than stipulated in the plan, but private and mixed sector capital investment, at JD540 million, was only 75 percent of the planned target. The declining value of share prices on the Amman Financial Market since the early 1980s also indicated low private participation in equity markets.
Government officials have, on occasion, criticized the private sector for its unwillingness to make capital investments and its general preference for trade and consumption rather than production and investment. Revitalization and expansion of the private sector has been a long-standing official development priority. Perhaps the government's most important policy tool has been Central Bank regulation of bank interest rates on both loans and deposits. By setting ceilings on the interest rates that banks can charge certain borrowers, the government has tried to channel loans to capital-starved enterprises. The government also has encouraged foreign direct investment in the hope of stimulating growth of the domestic private sector through partnerships and joint ventures with foreign companies.
The incentives that the government has had to provide foreign and domestic businesses to invest in the economy have, however, run somewhat contrary to the free market philosophy. Under the 1984 Encouragement of Investment Law, foreign investors were permitted to own up to 49 percent of a Jordanian company. In certain cases (for example, export-oriented manufacturing enterprises), foreign investors could own all of a Jordanian company. To encourage investment, companies received customs exemptions, almost complete tax exemption for up to nine years, and unlimited profit repatriation. In some cases, they were given free land and facilities. Free zones granting similar concessions were established near Al Aqabah and near the Syrian border to encourage wholly-owned Jordanian companies to engage in manufacture for export. Five industrial estates throughout the country offered the use of government-built infrastructure and extensive government-run services to Jordanian companies.
Although government economic support was weighted toward fostering investment, the government also provided subsidies that were deemed necessary to guarantee citizens' welfare and political stability. The main government agent for subsidizing and setting prices was the Ministry of Supply, which was established in 1974 after merchants hoarded sugar to force up prices. The hoarding sparked discontent in the country at large and particularly in the armed forces. In the late 1980s, the Ministry of Supply imported wheat, meat, and other basic foodstuffs and distributed them at subsidized prices and bought crops from Jordanian farmers at higher-than-market prices. In the 1989 budget, JD33.2 million was allocated to food subsidies alone. The government also subsidized fuel, water, and electricity.
The government repeatedly has stated that it intends to phase out subsidies. The import restrictions imposed in 1988, however, had almost immediate unintended price effects that necessitated further subsidies and price setting. Although the government intended to ban only luxury imports, merchants began to hoard their inventory of imported goods in expectation of future restrictions. Hoarding led to sharp and sudden price inflation of such vital items as medicines and food. Domestic producers of goods that could substitute for imports also raised prices. In 1988 the Ministry of Supply announced that for the first time it would set or subsidize prices for tea, matches, electrical appliances, construction materials, and numerous other goods. For similar welfare reasons, unemployment was mitigated by public sector hiring, and the public payroll swelled to account for more than 40 percent of the work force in 1987.
In 1989 it was difficult to assess whether the government's role in the economy was increasing or decreasing. The government's forceful intervention with specific restrictions to stabilize the economy during the 1988 financial crisis was uncharacteristic. In general, the government appeared uncomfortable with the size of the role it was forced to play in the economy.
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