There is some speculation in Jordan as to the growth rate this year. A senior government official claimed recently that the growth rate would be 4 percent. Others, who claim they know better, do not expect more than 2 percent. Either rate is a far cry from the rates of 1993, 1994 and 1995. But how does a country achieve high economic growth?
Economic theory prescribes three underpinnings for economic growth: the efficient allocation of resources within the economy; the accumulation of production factors (natural resources, capital, labor and entrepreneurship); and technological advancements. Poorer countries that devise the proper institutional frameworks could achieve larger growth rates than richer ones because they start from low levels of income and efficiency. Therefore, improvements in output are relatively easier in the less developed than in the developed.
However, choosing the proper institutions and the optimal institutional arrangement to achieve fast growth rates requires significant skill. According to Jeffery Sachs, the well-known Harvard economist, countries that have achieved high economic growth rates share the following characteristics.
Openness of the economy: they allowed manufacturers to operate at near world prices, both for inputs and exports, through currency convertibility, zero or extremely low tariffs, implicit or explicit export subsidies, and institutional support of the export activity. However, in the case of Jordan, the economy still suffers from high tariff rates that reach effectively 16 percent. Furthermore, every time tariffs have been lowered due to some free trade agreement, they were compensated with other forms of internal taxation.
Promotion of high domestic saving rates through fiscal policy: government spending is between 13 percent and 30 percent of GDP and therefore governments of fast growing economies have surpluses or extremely low budget deficits. In Jordan, the budget deficit is high, it reached close to 10 percent last year and there is no compelling evidence that it will fall next year. Furthermore, the majority of spending goes to hiring what amounts to more than 40 percent of the labor force.
High degree of internal competition: markets are open to domestic and international competition, the percentage of production by state owned monopolies is very low, and the firms operate in a flexible labor market where there is little restriction over hiring and firing. The markets in Jordan are subject to great distortions arising from the absence of any policy that encourages competition or the control of monopolies; steel and coffee are only two examples of highly distorted markets.
Small government with low marginal tax rates: low corporate tax rates encourage greater investments and higher returns while downsizing government.
Corporations in Jordan enjoy low tax rates; however, given the domestic market size, these rates should be even lower, with less bureaucracy.
Industrial policies: over and above the variety of policies among the fast growing economies, they all had industrial policies. All policies have an underlying common theme of currency convertibility, moderate tariffs and a strong private sector orientation.
In many countries, export processing zones or special economic zones have been utilised to attract foreign direct investment. Jordan has its QIZs and the Aqaba special economic zone but an effective economic policy or doctrine is yet to be drafted.
So, are we going to have high growth rates in the near future? I hope so. However, a lot needs to be done and fast. There is no time for waiting. — ( Jordan Times )
Yusuf Mansur
