Economic Freedom in Action: The Jordanian Experience

By Nidal Bitar:

The Young Entrepreneurs Association – YEA

Topics Quick Review of the Level of Economic Freedom – Jordan (1975 - 2007)

Review of Area Economic Freedom Ratings – Jordan (1980 - 2007)

Area Economic Freedom Ratings – Jordan (2007)

Zoom in On Area 5: Regulation of Credit, Labor and Business – Jordan (2007)

The Jordanian Experience related to Regulation of Credit, Labor and Business in 2007 Private sector credit Minimum wage Hiring and firing regulations Centralized collective bargaining Mandated cost of hiring Price controls Burden of regulations Bureaucracy costs Extra payments/bribes

Level of Economic Freedom – Jordan (1975 - 2007)

Source: Economic Freedom Network.

Rank 50 58 40 59 64 30 30 30 37 40 35 45 34

Area Economic Freedom Ratings – Jordan (1980 – 2007)

Source: Economic Freedom of the World: 2009 Annual Report

Area Economic Freedom Ratings – Jordan (2007)

Source: Economic Freedom of the World: 2009 Annual Report

Zoom In on Area 5: Regulation of Credit, Labor and Business

The Jordanian Experience - 2007

The extent to which government allows markets to determine prices and

refrains from regulatory activities that retard entry into business and increase

the cost of producing products.

Area 5: Regulation of Credit, Labor and Business – Jordan (2007)

Source: Economic Freedom of the World: 2009 Annual Report

Area 5: Regulation of Credit, Labor and Business – Jordan (2007)

Source: Economic Freedom of the World: 2009 Annual Report

Jordan Vs Singapore

Private Sector Credit (7.86/10.00)

The public sector debt is high relative to the total credit market.

Large number of economic initiatives required government borrowing since 2000

Absence of active capital markets means that the government borrows from the banks

The increase in fiscal deficit resulted in the government increasing local borrowing – crowding-out private borrowers.

Large government

With fiscal discipline, the picture will improve.

Source: www.cbj.gov.jo

Minimum Wage (5.17/10.00)

Minimum wage = 115JD (QIZ) , 150 JD (Base)

Due to pressure of social policy, inflation, labor unions etc the government imposes a relatively high minimum wage in Jordan.

Government is pushing to raise to 150 for QIZ!!!!

The minimum wage limits competitiveness in certain sectors (e.g. textile) vis-à-vis Asian / regional markets (such as Bangladesh, Vietnam and Egypt) – resulted in several recent closures and relocation of plants.

The recent rise in inflation due to US$ peg and commodities prices increase in 2007-2008 placed additional pressure on the government to raise the minimum wage.

Minimum wages are ‘sticky’ – hard to reverse.

The solution is in increased productivity / value added and more inflation aware monetary policy in the future

Hiring and Firing Regulations (3.57/10.00)Mandated Cost of Hiring (6.66/10.00)

All due to antiquated labor law (16/06/1996) which contradicts with the reform efforts done after 1999

Based on social cost / welfare impact on the employee rather than an overall economic welfare maximization

No changes on the horizon

Centralized Collective Bargaining (7.61/10.0)

Powerful professional unions are a part of the socio-economic landscape of Jordan.

The impact of the unions on ‘price control’ is evident.

With growth, the roles and impact of such unions will decline in effect but not disappear entirely

Price Controls (3.0/10.0)

Jordan engaged historically in price control, along with extensive subsidies to protect consumers

Since the rating was conducted in 2007 and with the sharp rise in commodity prices, the government has

engaged in a process of de-subsidizing / targeted subsidies and price liberalization across the board covering

a wide range of commodities (e.g. fuel, foodstuff, building material, etc)

2007 witnessed increase of oil & commodities prices which slowed down the government efforts in

liberalization of prices.

Since the beginning of 2009, there has been a fundamental shift in the approach to consumer protection,

especially in the area of foodstuff as the government entered into partnership with the private sector to

provide basic food imports at managed profit margins to preserve competition in the market.

Burden of regulations (5.88/10.00)Bureaucracy Cost (3.99/10.00)

The cost of compliance and the administrative burden are very high in Jordan.

This is due to a traditionally large bureaucracy and active public sector (Large Government)

This is changing:

Streamlining government bureaucracy and process

E-Government started

Specialized entities to help ‘cut through the red tape’ (e.g. Jordan Investment Board, Special / Developmental Economic Zones in Aqaba, Petra, Dead Sea, Mafraq and others)

Involvement at the highest level of the Executive Branch in marketing and facilitating new investments

Promoting service excellence within the government (King Abdullah II Awards for Excellence, Ministry of Public Sector Development)

Extra payments / Bribes (6.84/10.00)

Corruption is a fact of life in emerging economies.

A new anti-corruption law was introduced in 2008.

Along with stricter laws, the reduction of the bureaucracy burden and improved transparency will help reduce corruption.

Thank you