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Jordan Table of Contents


Industrial Policy

Like most nations with ambitious development plans, Jordan pinned its hopes on growth, particularly in the export of manufactured goods. Although high tariff and nontariff barriers sheltered selected industries from competition from lower cost imports, both nominal and effective rates of protection generally were low by the standards of developing economies. On the one hand, effective protection was high for paper and wood products, furniture, and apparel. On the other hand, imports of machinery, electrical equipment, and transport equipment were effectively subsidized. In view of its sustained high level of import of manufactured goods, observers viewed Jordan's pursuit of importsubstitution industrialization as moderate.

Jordan's import policy theoretically was designed to promote domestic manufacturing industries by ensuring their access to cheaper imported capital goods, raw materials, and other intermediate inputs rather than by granting them monopoly markets. The government believed that development of a domestic manufacturing base had to be led by exports because Jordan's small population could not generate enough consumer demand for manufacturing plants to achieve economies of scale or scope. In some cases, consumer demand was too low to justify building even the smallest possible facility. Domestic consumer demand alone was insufficient to support some manufacturing industries despite the relatively high wages paid to Jordanian workers; the high wages resulted in increased product costs and diminished export sales of manufactured goods. In the late 1980s, according to a Jordanian economist, the country continued to experience constant returns to scale despite its significant exports. Essentially, Jordan was still in the first stage of industrial production, in which the per unit costs were high because of limited output.

The relative contributions to manufacturing expansion made by domestic demand growth, export growth, and import substitution were difficult to assess accurately. Growth in domestic demand stimulated almost 60 percent of manufacturing expansion, export growth contributed a moderate 12 percent, and import substitution contributed nearly 30 percent. But exports accounted for about 33 percent of the growth of intermediate goods (fertilizers and other inputs) industries, and about 25 percent of the growth of consumer goods industries. In contrast, external demand contributed virtually nothing to growth in the metal products, iron and steel, rubber, and glass industries; import substitution, domestic demand growth, or a combination of the two accounted for all domestic manufacturing growth, resulting in self-sufficiency. In the case of the furniture, apparel, textile, and industrial chemical industries, however, either increased domestic demand, increased foreign demand, or a combination of both led to simultaneous domestic manufacturing growth and increased imports.

In the 1970s and early 1980s, the government concentrated on developing the first tier of the manufacturing sector--the production of chemicals and fertilizers--because, unlike consumer goods, these commodities appeared to have guaranteed export markets. The government followed this policy although the second tier of the manufacturing sector--the production of consumer goods- -had significantly higher value added. The government strategy was to increase value added in exported commodities by producing and exporting processed commodities, such as fertilizers from raw phosphates and metal pipes from ore and ingots. Because some other Middle Eastern and West Asian nations had adopted the same strategy, competition for markets increased at the same time that demand slumped. Jordan suffered from declining terms of trade as the value of its processed commodity exports fell relative to the value of its consumer and capital goods imports.

In the late 1980s, therefore, Jordan was reassessing its industrial strategy and searching for potential areas of comparative advantage in exporting light-manufactured goods and consumer and capital goods that had higher value added. Consumer goods were protected in many foreign markets, and Jordanian exports as a percentage of output in the consumer goods sector ranged only between 2 percent and 9 percent, as opposed to a range of 12 percent to 35 percent in the extractive industry based manufacturing sector. Accordingly, Jordan hoped to take advantage of its educated work force and increase the manufacture of capital goods that were either technical in nature or required engineering and technical expertise to manufacture. Those types of products had more appeal in foreign markets. To promote such development, the government established the Higher Council for Science and Technology, which in turn founded the private-sector Jordan Technology Group as an umbrella organization for new hightechnology companies.

Throughout the 1970s and 1980s, the profitability of some capital goods industries, measured as a ratio of both gross output value and of value added, fell steeply compared to profit ratios in the commodities and consumer goods sectors. During the same period, profitability of the natural resources sector declined minimally, while profitability of the consumer goods sector rose. The capital goods sector had been much more profitable than the natural resources sector; but by the late 1980s, the two sectors were equally profitable. The main cause of the plunge in profitability among capital goods apparently was price inflation of imported intermediate inputs. Especially affected, for example, were the electrical equipment and plastics industries--precisely the type of technical industries that Jordan envisaged as important to its economic future. The drop in profitability was not irremediable, however, and government officials continued to be optimistic about prospects in technical industries, particularly those that were skill intensive and labor intensive rather than capital intensive.

The pharmaceuticals and veterinary medicines industries were examples of the new direction of industrial development policy. The government-established Arab Pharmaceutical Manufacturing Company exported more than 70 percent of its production in 1987. A halfdozen other drug and medical equipment companies were garnering a large share of the Middle Eastern market in the late 1980s. Engineering industries also were a development target. In 1985 this manufacturing sector accounted for about 9 percent of manufacturing value added, 14 percent of total manufacturing employment, and about US$5 million in export sales. About 95 percent of the sector was devoted to basic fabrication of metal sheets, pipes, and parts. Jordan also exported in limited quantities more sophisticated products, such as domestic appliances, commercial vehicles, electrical equipment, and machinery; eventually it wanted to produce and export scientific equipment and consumer electronics. Another developing industry was plastic containers and packaging, of which about one-quarter of output was exported.

The strategy to boost manufactured exports ultimately had to take into account the low manufacturing productivity growth of the 1980s. Average annual productivity growth was estimated at 2 percent to 3 percent, and in 1986 it was a mere 1.4 percent. In several specific sectors, productivity was actually falling. Because this low or negative growth occurred at a time when labor productivity was increasing rapidly, it was attributable to some combination of insufficient investment and stagnant domestic and foreign demand. Jordan's average industrial capacity utilization, according to a UN report, was about 57 percent, but varied widely according to industry. Pent up consumer demand for some products was great enough so that any increase in capacity could be translated automatically into increased production and sales. Capacity utilization was almost 100 percent for certain chemical and consumer goods factories, indicating that more investment might be warranted, whereas capacity utilization in the production of certain household furnishings and building products was very low, suggesting suppressed or little demand. Spare production capacity meant that manufacturers would be able to meet sudden demand surges. In 1987, following a period of declining production, Egypt agreed to import construction materials and output of cement and metal pipes jumped 32 percent and 48 percent, respectively. Production of paper and cardboard also increased about 36 percent as the packaging industry developed, but production of detergent dropped 8 percent and production of textiles dropped 13 percent, leaving spare capacity. The variability of capacity utilization indicated the problems that the government had to confront in forecasting domestic and foreign demand for manufactured goods.

Data as of December 1989

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Jordan Table of Contents