Too Much of a Good Thing

An over reliance on foreign aid has allowed successive governments to put off taking the tough steps needed to create a truly sustainable economy. For the sake of Jordan’s future, this has to change.

By Laith al-Qasem

Jordan is a political entity with an economy attached to it. It’s been this way since the establishment of the Emirate of Transjordan in 1926. Our government and country have been supported by foreign aid from numerous external countries for the past 95 years. At first it was Great Britain from 1921 until the Suez crisis of 1956, followed by the United States and then by the petroleum producing Arab states after the Arab Summit of 1978 in Baghdad. While over recent years, we have been supported by seemingly everyone.

Although this aid has been needed and much appreciated, we have become addicted to it down the years. Much of the government’s efforts are focused on securing a donor fix instead of trying to develop and sustain a competitive local economic environment. Securing aid is even listed as an objective in the government’s 2016 budget.

To this end, the government markets itself as an indispensible player on the regional political scene. This means that Jordan constantly redefines the role it plays to match with the changing times. This may be politically expedient, but it’s economically untenable.

Helping Build Other Economies

Jordan has for decades placed great emphasis on the importance of education in national development. In the country’s early years, education provided a path to a better life for farmers and nomads who eventually became employees of the state with a secure salary. This trend continues to this day, although its economic utility is no longer justified.

Since the late 1980s, Jordan has embarked on developing and supporting entrepreneurship to create jobs and hopefully foster an innovative, knowledge-based economy. To a great extent, these new national entrepreneurial efforts have been successful. But many talented Jordanians have established companies in the Kingdom, only to become frustrated with the local business environment because of unclear, random or subjective interpretations of commercial regulation, particularly concerning tax. As a result, many Jordanian entrepreneurs have decided to transfer their businesses to countries in the Gulf and even Egypt. So frustratingly, Jordan’s chronically uncompetitive business environment is helping build vibrant and internationally competitive knowledge sectors in other countries.

A constant stream of foreign aid disassociates government from the local economic reality. Dependable external support prevents the government from building and maintaining a promising and competitive business environment. Government competency seems to be based on how much foreign aid can be secured from the international donor community, not on how many jobs can be created and sustained, nor by how many businesses are established, or by the level of competitive exports. The government’s objectives are not aligned with the prosperity of the private sector.

As long as the government is able to fund itself with a combination of tax revenue and foreign assistance it will likely pay insufficient attention to the business environment. Thus, insufficient focus is paid to developing and maintaining an attractive and competitive business environment. Moreover, since the government is somewhat disassociated from the performance of the private sector, their decisions to increase taxes are shortsighted and target minimizing the budget deficit with little thought to the downstream likely implication of such action.

Supporting the Private Sector

A recent article by Professor Livio Di Matteo of the Canadian Fraser concluded that annual per capita GDP growth is maximized when government spending constitutes 26 percent of the economy.

This analysis confirms other studies showing a positive return to economic and social growth and progress when government focuses its spending on basic services like the protection of property. Di Matteo’s research also demonstrated the existence of a tipping point where more government spending hinders economic growth and doesn’t contribute to social progress.

These results are important because the Jordanian public sector constitutes 42 percent of the work force and 37 percent of GDP. Moreover, government employees are generally better paid than private sector employees. As comparison, the public sector in the United Kingdom constitutes 19 percent of the work force.

As such, the government of Jordan’s main objectives become self-preservation through international donor funding and subjective interpretations of Jordanian commercial and tax laws depending on the size of the budget deficit. The size and effectiveness of any government must be measured relative to the size and prosperity of its private sector. Our government’s size is more closely related to the prosperity of our donor allies than to our private sector. So, subjective private sector taxation and foreign aid actually subsidize public sector employment.

This situation is driving out Jordan’s successful startups and even many of its successful veteran companies. If Jordan is losing its own investors to other business environments, it will be unable to attract foreign direct investment which will exacerbate an existing unemployment problem.

Should this continue, the government’s dependency on foreign assistance will increase as will the predatory nature of taxation on successful indigenous companies. There are already signs of central government attempts to cannibalize protected monopolies such as NEPCO in an attempt to cover the existing budget deficit.

The more this occurs the more the government paints itself into a corner. It needs to work on developing and improving its tax base further, while reducing its dependency on both donor aid and subjective taxation. If this isn’t done, then the government is likely to see justification in employing more draconian taxation measures which will weaken the stability the country has been blessed with so far.

The government needs to develop a plan to gradually reduce its size over time. The Ministry of Public Sector Development should start implementing a probabilistic employee evaluation methodology. Each department within each ministry must evaluate the relative performance of each employee. Through this method, the government will ease out the least competent performers while maintaining the superior performers.

As time progresses, the government will weed out mediocrity while maintaining the better performing employees. Additionally, the use of such a system increases and sustains competition among existing employees. Key to the success of such a system is the requirement that departmental managers must distribute their evaluations appropriately.

So, within any department, 68 percent must be evaluated as average, 13.5 percent below average, 13.5 percent above average, 2.5 percent poor performers, and 2.5 percent excellent performers. Using these standards will force managers to select the best and brightest to serve the objectives of the individual departments and the institution as a whole. Managers who do not evaluate according to statistical distribution should be viewed as not doing their job and exhibiting favoritism.

Government should also lead the development of projects that address national and even development needs—including energy, water, tourism, and logistics—in which the government can partner with the private sector through public-private partnerships. Such projects can be in the form of renewable energy projects, water harvesting projects, and logistics. These companies should be regular ones; limited liability companies, private shareholding companies, or public companies, which abide by the same commercial and tax regulations as others.

It is also suggested that a special government employee pension fund be established to fund the retirement of government employees through these and other private sector companies. Such funding will help align the long-term interests of government employees with the sustainable prosperity of these companies. Such alignment will mitigate subjective readings of the commercial and tax laws.

Laith al-Qasem is the CEO of Arabian Business Consultants for Development and one of the Founders of the Young Entrepreneurs Association