Jordan has capacity to absorb investments

Published November 21st, 2000 - 02:00 GMT

A mechanical and one-dimensional approach to statistics in general and to national accounts in particular may lead to the wrong conclusions. The worst mistake that can be committed in this respect is to consider the rate of economic growth of the gross domestic product (GDP) in a given year as the result of only new investments made during that year. If the GDP rate of growth is zero, which is not unusual, the wrong conclusion would be that the investments made during that year were barren and without any economic return.  

 

Had that been the case, private investors would not have made the investments in the first place; they committed their capital only after having established the feasibility of the subject projects. The volume of new investments in the specific case of Jordan reached 22 percent of GDP in 1999.  

 

They are basically made up of construction (65 percent), mainly houses and offices, transport equipment (25 percent) and other equipment and machinery (10 percent). Return on investments in buildings is roughly estimated at 7 percent per annum, on transport equipment 15 percent, and on machinery is usually delayed to some coming years.  

 

The new investments made by the private sector are therefore supposed to be feasible, and yield an acceptable return.  

 

If, however, they do not cause the GDP to grow as expected, there must be some reasons which deserve to be identified and examined. First, we have to take into account that almost 50 percent of the investments made in recent years are needed only to replace retired and depreciated assets. Their job is not to increase the GDP but simply to prevent a drop in its value.  

 

On the other hand, there are other factors that influence the GDP, positively or negatively, without having to do with any new investment.  

 

For example, the GDP can grow without adding new capital, through successful penetration of new markets for exports or it can drop in the case of reduction of the productive capacity.  

 

Agricultural production, for instance, decreases if land is not cultivated due to lack of water. Industrial production drops if some factories do not operated two or three shifts a day, and trade contribution may shrink if competition forces reduction of profit margins, and so on.  

 

When an investor starts a new restaurant, he may succeed in attracting customers which otherwise would have flocked to other, old, restaurants. He does not create an additional new production, simply the business in this case has shifted from an old and dying economic unit to a new, rising one. The investment in that case is feasible as far as the investor is concerned, but it does not reflect positively on the GDP, and does not amount to a net increase in value added.  

 

In theory, good new investments may be established in a given year when the GDP growth is negative for reasons that are not related to the quantity or quality of the new investments.  

 

The capacity of the Jordanian economy to absorb new investments is very high indeed, especially in light of creeping globalization and full openness to the world markets. The huge markets of the European Union and the United States will become more accessible to the Jordanian exporters, thus the ceiling for investment absorption capacity is unlimited as long as labor is available. When it comes to absorption capacity, the sky is the limit. — ( Jordan Times )  

 

By Fahed Fanek  

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