Why the economy grows

In preparation for a paper to be presented at the “Political, Economic and Social Transformations in Jordan: 1984-2014” conference of the Centre for Strategic Studies at Jordan University, I tracked data over 30 years on the real economic growth rate, debt, government spending, unemployment and budget deficit.

All the variables are supposed to be related to the GDP growth rate; however, in wait for this researcher was another surprise: I could find no significant relationship between growth and the variables. 

The real economic growth rate is supposed to be negatively related to unemployment, such that when the economy grows, the unemployment rate falls as more Jordanians go to work. 

This is not the case in Jordan.

At times of high economic growth, unemployment also rises and the reverse is true.

This column often explained why such an anomaly happens, so I will not go into it again.

When the economy collapsed, causing the real per capita income to fall from JD1,269 in 1988, it took almost 18 years to return to that income level.

The real income per person did not reach that level again until 2005, a very special year when the economy received hundreds of thousands of wealthy Iraqis.

In other words, it took a major upheaval for the per capita income in Jordan to catch up with what it was before the crash. 

The slowness is an indication of an economy that lacks dynamism and competitiveness.

Government spending almost always moves in line with the economy: when the economy grows fast, government spends more (the wrong type of spending, of course, as it spends on hiring more employees), and when the economy contracts, government spending also contracts.

The movement of government spending is pro-cyclical (moves in tandem with the business cycle), which contradicts the accepted thinking and common best practice.

Government spending should be countercyclical, according to one school (Keynesian), and never pro-cyclical, according to other schools (monetarist, classical, Austrian and supply side).

Debt also rises in good times, and increases with aid. It is as if someone wakes up one day and suddenly discovers and decides that the economy needs funding and immediately borrows and receives all the money asked for.

This underscores that Jordan has an operational type of governance instead of a strategic one. 

Debt and aid do not affect growth, which is very strange, but can be explained by the fact that the majority of aid goes to paying salaries and settling outside due loan payments.

In other words, a great deal of the borrowing goes to pay back the debt; hence it is not felt at home. 

For example, when Saudi Arabia gave Jordan $1.4 billion in aid in 2011, the government used the whole amount, I believe, to pay an external oil debt; meanwhile the growth remained weak at 2.3 per cent.

As to the external and internal sources of the debt, the government used to borrow more from outside the economy until 2008 when it repaid the debt to the Paris Club and went to borrow internally, to crowd out investors and borrowers in the domestic market and cause the interest rates to rise and remain high.

A quick look at the figures shows how the internal debt started to skyrocket after that unfortunate year and become almost double the foreign debt, which by the way was borrowed at lower rates of interest.

Finally, economic growth seems to occur only in the aftermath of a regional mishap; it diminishes quickly (two to three years); and when there is a depression, it is usually caused by misguided local economics, otherwise known as “the prudent route to failure”.

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