Jordan THE 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
Women workers in a shoe factory
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.
Data as of December 1989
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