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Report Name Date Timeline Policies for High and Sustained Growth for Job Creation: 2012 Development Policy Review June 2012 Not Available Author Supporting Donor The World Bank None Sector Lead Ministry General Ministry of Planning and International Cooperation Key Topics Discriminatory Business Environment – FDI – Fiscal policy reform – Growth sustainability – Human capital development – Moral hazard – Open economy – institutional Reform – political Reform – Unemployment Executive Summary • Jordan has failed to sustain spells of high growth leading to an inability to reach high-income status. It has also resulted in sustained high unemployment, especially among youth, women, and educated people • Sustainable growth should be possible given Jordan’s strong human capital base in the country and in the diaspora around the world. Furthermore, market-oriented reforms in 2010 have made Jordan’s economy very open, and have led to the emergence of dynamic, non-traditional sectors such as ICT and medical tourism • Sustainable growth can be improved if the following favorable conditions are put in place: o Adequate, stable institutional framework to facilitate policymaking and long-term business development o A fiscal policy that can manage shocks and maintain macroeconomic stability o Growth-enhancing structural reforms to reduce unemployment Key Findings Jordan’s Long-Term Growth Performance • Jordan’s economic performance from 2000-2008 was better than the average for MENA due to market-oriented reforms and an exceptionally favorable external environment. Key reforms include property right reforms as part of the WTO ascension and free trade agreements with the EU (1997) and the US (2001) • FDI and productivity growth have become key drivers of Jordan’s growth o Net FDI inflows tripled to USD 2.8 billion from 2000 to 2008 o Rapid increase resulted from rise in global oil prices and excess savings in the Gulf countries with more than 50% of FDI to Jordan from oil exporters, namely Iraq and the Gulf • Weak growth sustainability was demonstrated by Jordan’s decline since 2009 due to strong ties to the Gulf economies • Jordan needs to diversify sources of FDI away from dependence on the Gulf and change sectoral allocation away from real estate. Potential other sectors include emerging high-skilled sectors and moving labor from low to high productivity sectors
Institutional Framework Institutional weaknesses are noticeable across the various stages of policy making in Jordan: • Policy formulation: public perception that past policies have failed, leading to lack of engagement with general public over policy initiatives • Implementation level: blurred ministerial mandates, weak coordination between ministries, frequent changes in government and ministerial leadership, and weak technical capacity of the bureaucracy • Evaluation/accountability stage: limited transparency, low contestability, and inability to hold government accountable or establish appropriate incentives
Macroeconomic Stability Fiscal policy settings in Jordan has been largely pro-cyclical, expanding in booms and contracting in recessions. Fiscal sustainability will require greater discipline around expenditures: • One consequence has been a moral hazard problem: 15% of Jordan’s total revenue (2000-2011) comes from foreign grants which mitigates the pressure to deal with underlying budget deficits and structural reform challenges and requirements • Furthermore, the frequency in government changes incentivizes a short-term mindset in government.
Structural Reforms for Robust Growth • Robust growth of skill-intensive sectors would reduce unemployment by 2016, but still leave unemployment around 10-11%. Therefore solely focusing on knowledge-intensive sectors is unlikely to solve Jordan’s unemployment problem. Attention should also be paid in sectors in “traditional” labor-intensive sectors where Jordan has a comparative advantage, such as tourism, textiles, and retail trade • Only 58% of jobs created in 2000-2008 were in the private sector, and only 28% of those jobs went to Jordanians with a high level of jobs being captured by foreign workers • While Jordan’s performance for new products and new markets is poor, Jordan does well with exports of existing products to existing markets • Jordan’s trade after conducting free trade agreements has diversified without resulting in trade creation. In fact, the net effect is negative because Jordan is losing the duties that were previously charged on goods from countries that are now “preferential” partners • The business environment for all companies in Jordan is not the same, as rules and regulations are not applied equally • Industrial policies in Jordan are not clear-cut, as several ministries have overlapping responsibilities and varying objectives Recommended Actions and Initiatives Strengthen Institutional Framework • Enhance external/political accountability o Continue reforms to electoral system and political parties to improve competition and enhance political inclusion o Move towards a political system in which the prime minister and the government reflect the composition of parliament, and are more accountable to the Chamber of Deputies o Continue decentralization to empower local governments • Improve accountability within the bureaucracy o Adopt merit-based incentives for public employees, linking hiring to possession of specific skills instead of a certain degree o Improve coordination at policy-making and technical levels and engage in proactive government communication o Establish working groups with defined work programs and deliverables overseen by a public sector cabinet • Empower civil society o Broaden and formalize existing evaluation mechanisms e.g. KACE survey o Institutionalize certain civil society initiatives, such as those that promote public-private partnerships, greater information sharing, and consultation of the public
Improve Fiscal Policy • Address moral hazard o Reduce dependence on foreign grants to force fiscal policy adjustment o Contain the increasing wage bill and price subsidies to decrease deficits o Reduce tax exemptions • Improve institutional underpinnings of fiscal policy o Make fiscal commitments clear by introducing targets and transparent procedures for implementation o Create independent fiscal body insulated from political pressure
Implement New Structural Reforms • Revisit export promotion activities o Target specific markets to penetrate, especially those with which Jordan has signed free trade agreements o Partner with established companies that have experience exporting their products o Revise the ‘Jordan Upgrading and Modernization Programme’ (JUMP) to diversify export destinations and improve quality of export goods • Reform public administrations responsible for business environment o Minimize discretion in business environment policy and incentives that could discriminate between firms o Transfer decision-making to lower-tiers of the public administration, instead of ministerial level, and train officials on regulatory issues • Reduce uncertainty in policy implementation o Transform temporary laws into regular legislation o Strengthen dialogue between the government and the private sector on the issue of new regulations • Introduce municipal-level reforms by incentivizing local administrations to improve economic performance • Reform the efficacy of innovation policy and provide improved funding and long-term innovation leadership that outlasts changing governments • Provide support for reforms on industrial policies to allow policies to enhance competitiveness and promote retraining in the sector
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