Economic Freedom In Action: The Jordanian Experience

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Presentation by Nidal Bitar, Young Entrepreneurs Association of Jordan, at the 4. Economic Freedom of the Arab World Conference in Marrakech (November 13-15, 2009)

Presentation by Nidal Bitar, Young Entrepreneurs Association of Jordan, at the 4. Economic Freedom of the Arab World Conference in Marrakech (November 13-15, 2009)

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  • Area 1: Size of Government: Expenditures, Taxes and Enterprises: A measure of the levels of government spending as a share of the total, the extent of the government enterprise sector, and the marginal tax rates; Area 2: Legal Structure and Security of Property Rights: The extent to which a country protects the individual rights of persons and their rightfully acquired property; Area 3: Access to Sound Money: The extent to which a country follows policies and adopts institutions that lead to low (and stable) rates of inflation and avoids regulations that limit the ability to use alternative currencies; Area 4: Freedom to Trade Internationally: A measure of the restraints that affect international exchange: tariffs, quotas, hidden administrative restraints, and exchange rate and capital controls; Area 5: Regulation of Credit, Labour, and Business: 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. Chain-Linked: Users doing long term or longitudinal studies are encouraged to use the chain-linked index as it is the most consistent through time The chain-linked summary index (exhibit 1.4) permits comparison over time. The average economic freedom score rose from 5.55 (out of 10) in 1980 to 6.70 in 2007, the most recent year for which data are available Through time, the index has become more comprehensive and the available data more complete. As a result, the number and composition of the components for many countries will vary across time. This presents a problem similar to that confronted when calculating GDP or a price index over time when we know that the underlying goods and services are changing from one year to another. In order to correct for this problem and assure comparability across time, we have done the same thing that statisticians analyzing national income do: we have chain-linked the data.
  • Private sector credit This sub-component is based on the percentage of domestic credit consumed by the private sector. Higher values are indicative of greater economic freedom. Thus, the formula used to derive the country ratings for this subcomponent was (Vi − Vmin) / (Vmax − Vmin) multiplied by 10. Vi is the share of the country’s total domestic credit allocated to the private sector and the values for Vmax and Vmin are set at 99.9% and 10.0%, respectively. The 1990 data were used to derive the maximum and minimum values for this component. The formula allocates higher ratings as the share of credit extended to the private-sector increases. A country’s rating will be close to 10 when the private sector’s share of domestic credit is near the base-year maximum (99.9%). A rating near zero results when the private sector’s share of credit is close to the base-year minimum (10.0%). v Source International Monetary Fund, International Financial Statistics (various issues).
  • Minimum wage This sub-component is based on the World Bank’s Doing Business data for the ratio of mandated minimum wage to the average value added per worker, a component of the “Difficulty of Hiring Index.” Countries with higher mandated minimum wages relative to average value added per worker are given lower ratings. The formula used to calculate the zero-to-10 ratings for this sub-component was: (Vmax − Vi) / (Vmax − Vmin) multiplied by 10. Vi represents the ratio between minimum wage and average value added per worker. The values for Vmax and Vmin were set at 79% (1.5 standard deviations above average) and 0%, respectively. Countries where the minimum wage was more than 79% of the average value added per worker were given a rating of zero. Countries with values outside of the Vmax and Vmin range received ratings of either zero or 10, accordingly. v Source World Bank, Doing Business (various issues), <http://www.doingbusiness.org/>.
  • Hiring and firing regulations This sub-component is based on the Global Competitiveness Report’s question: “The hiring and firing of workers is impeded by regulations (= 1) or flexibly determined by employers (= 7).” The question’s wording has varied slightly over the years. v Source World Economic Forum, Global Competitiveness Report (various issues), <http://www.weforum.org/en/initiatives/gcp/index.htm>. Mandated cost of hiring This sub-component is based on the World Bank’s Doing Business data on the cost of all social security and payroll taxes and the cost of other mandated benefits including those for retirement, sickness, health care, maternity leave, family allowance, and paid vacations and holidays associated with hiring an employee. The formula used to calculate the zero-to-10 ratings was: (Vmax − Vi) / (Vmax − Vmin) multiplied by 10. Vi represents the hiring cost (measured as a percentage of salary). The values for Vmax and Vmin were set at 33% (1.5 standard deviations above average) and 0%, respectively. Countries with values outside of the Vmax and Vmin range received ratings of either zero or 10, accordingly. v Source World Bank, Doing Business (various issues), <http://www. doingbusiness.org/>.
  • Centralized Collective Bargaining This sub-component is based on the Global Competitiveness Report’s question: “Wages in your country are set by a centralized bargaining process (= 1) or up to each individual company (= 7).” The question’s wording has varied slightly over the years. V Source World Economic Forum, Global Competitiveness Report (various issues), <http://www.weforum.org/en/initiatives/gcp/index.htm>.
  • Price controls The more widespread the use of price controls, the lower the rating. The survey data of the International Institute for Management Development’s (IMD) World Competitiveness Yearbook (various editions) were used to rate the 46 countries (mostly developed economies) covered by this report. For other countries, other sources were used to categorize countries. Countries were given a rating of 10 if no price controls or marketing boards were present. When price controls were limited to industries where economies of scale may reduce the effectiveness of competition (e.g., power generation), a country was given a rating of 8. When price controls were applied in only a few other industries, such as agriculture, a country was given a rating of 6. When price controls were levied on energy, agriculture, and many other staple products that are widely purchased by house-holds, a rating of 4 was given. When price controls applied to a significant number of products in both agriculture and manufacturing, the rating was 2. A rating of zero was given when there was widespread use of price controls throughout various sectors of the economy. v Sources International Institute for Management Development (IMD), World Competitiveness Yearbook (various issues); Price Waterhouse, Doing Business In … publication series; World Bank, Adjustment in Africa: Reforms, Results, and the Road Ahead (1994); Economist Intelligence Unit, EIU Country Reports and Country Commerce, 2001; US State Department, Country Commercial Guides and Country Reports on Economic Policy and Trade Practices (various years).
  • Burden of regulations (Administrative requirements) This sub-component is based on the Global Competitiveness Report’s question: “Complying with administrative requirements (permits, regulations, reporting) issued by the government in your country is (1 = burdensome, 7 = not burdensome).” v Source World Economic Forum, Global Competitiveness Report (various issues), <http://www.weforum.org/en/initiatives/gcp/index.htm>. Bureaucracy costs This sub-component is based on the Global Competitiveness Report’s question: “Standards on product/service quality, energy and other regulations (outside environmental regulations) in your country are: (1 = Lax or nonexistent, 7 = among the world’s most stringent).” v Source World Economic Forum, Global Competitiveness Report (various issues), <http://www.weforum.org/en/initiatives/gcp/index.htm>.
  • Extra payments / Bribes This sub-component is based on the Global Competitiveness Report’s question: “In your industry, how commonly would you estimate that firms make undocumented extra payments or bribes connected with the following: A– Import and export permits; B–Connection to public utilities (e.g., telephone or electricity); C–Annual tax payments; D–Awarding of public contracts (investment projects); E–Getting favorable judicial decisions. Common (= 1) Never occur (= 7).” v Source World Economic Forum, Global Competitiveness Report (various issues), <http://www.weforum.org/en/initiatives/gcp/index.htm>.

Transcript

  • 1. Economic Freedom in Action: The Jordanian Experience By Nidal Bitar: The Young Entrepreneurs Association – YEA
  • 2. 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
  • 3. 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
  • 4. Area Economic Freedom Ratings – Jordan (1980 – 2007) Source: Economic Freedom of the World: 2009 Annual Report
  • 5. Area Economic Freedom Ratings – Jordan (2007) Source: Economic Freedom of the World: 2009 Annual Report
  • 6. 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.
  • 7. Area 5: Regulation of Credit, Labor and Business – Jordan (2007) Source: Economic Freedom of the World: 2009 Annual Report
  • 8. Area 5: Regulation of Credit, Labor and Business – Jordan (2007) Source: Economic Freedom of the World: 2009 Annual Report
  • 9. Jordan Vs Singapore
  • 10. 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
  • 11. 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
  • 12. 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
  • 13. 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
  • 14. 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.
  • 15. 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)
  • 16. 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.
  • 17. Thank you