To King Abdullah of Jordan
by Fred E. Foldvary, Senior EditorKing Hussein, who ruled Jordan since 1952, died on February 6, 1999. His son, Abdullah, is king at age 37. This is a time of peril and of opportunity for Jordan. While the new king is not likely to be reading this Progress Report editorial, this seems a good time to lay out the scope of reforms that Jordan could take to safeguard its stability and to become free and prosperous.
The economy of Jordan has been far from its potential. Unlike other countries in the Middle East, Jordan has no oil. But the key to Jordan's prosperity is not oil or other material resources, but sound economic policy. Jordan has also suffered from the turmoil of the region, including the cutting off of trade with Iraq. The Kingdom is dependent on foreign aid, mostly from Saudi Arabia and the Gulf emirates. President Clinton has pledged $300 million in aid. But with the right policies, Jordan could become so prosperous it would provide aid rather than receive it.
Among the over 100 countries ranked for economic freedom by the study published by the Fraser Institute, Economic Freedom of the World, Jordan ranked 57, in the middle. The Index of Economic Freedom published by the Heritage Foundation also rates Jordan at around the midpoint in economic freedom. King Hussein began some economic reforms in 1988, when he also shifted more political power to the parliament. But many restrictions and taxes continue to create barriers to Jordan's prosperity.
Jordan has pursued a protectionist trade policy, with an average tariff of about 13 percent. Taxes on some goods such as automobiles range up to 200 percent. The customs bureaucracy adds to the barrier to imports. Jordan's trade barriers also lead to smuggling. Free trade would shift Jordan's production to those fields in which it has a comparative advantage, while decreasing the cost of living.
High domestic taxes, especially on corporations, limit investment and economic growth. The top corporate and personal income tax rate is 55 percent. Taxing "where the money is" does not help the economy. King Abdullah would be wise to eliminate all income taxes and replace them with public revenue from Jordan's land rent.
Jordan has some price and wage controls with the aim of helping the people on the low end of the income scale. But low prices limit the profits from producing these goods, and thus limit production and jobs. The king should eliminate rationing, price controls, and subsidies for food. Free trade would reduce the price naturally and allow the supply to increase. Eliminate minimum wages, and raise wages instead by eliminating tariffs and income taxes.
The Hashemite Kingdom of Jordan also suffers from environmental damage. Mostly desert, the country has undergone deforestation, overgrazing, soil erosion, and desertification. As part of the reform of public finance, the government should charge fees and rents for the use and abuse of its natural resources that reflect the social cost. This would stop the environmental degradation.
On the political front, the leaders of the Jordanian nationalist movement want to increase the powers of parliament and limit the powers of the king as a constitutional monarch. Since Jordan's independence in 1946, the original Bedouin population has become a minority, after several waves of Palestinian immigrants, who are now the majority. Though they respect the king, the people also want self-government. But the European model of democracy leaves the country vulnerable to the sway of special interests and the possible instability of multiple-party coalitions.
The way out of this dilemma is to look back to the old Turkish empire, which ruled the land of Jordan before 1921, when the League of Nations carved out the mandate of Transjordan under British administration. Under the millet system of the Turkish empire, local communities were self-governing. Decentralizing government services and power down to the village and neighborhood level would provide self governance while reducing the scope for special interests and power seeking.
A great accomplishment of King Hussein was the achievement of peace with the State of Israel in 1994. Israel could help strengthen this peace if it offered free trade with Jordan. Jordan could become a center of commerce for the Arab world and the Middle East if it continues the path towards peace and if it moves towards rent-based public finance, free trade, and decentralized democracy.
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Copyright 1999 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.