As the government has learned from its deal with the IMF, ill-conceived economic reforms can often do more harm than good.
By Khalid Wazani
Economic reform is a process that should be evolutionary not revolutionary, gradual not instantaneous, comprehensive not one-sided, and participatory not exclusive. This means that a reform path should be taken step by step, we should have a clear set of priorities, deal with both the demand and supply sides of the market, and be inclusive of all economic stakeholders.
However, economists conclusively agree that the removal of subsidies should be the last step in the process of reforming an economy, not the first, as it should come after economic distortions are dealt with and enough economic activity and jobs have been generated. The end result of such a reform process should be an all round healthier economic environment.
Jordan has plenty of experience in dealing with economic reform programs, starting from 1989 when the country signed up to its first stabilization and structural adjustment program with the IMF and the World Bank. That exercise led to the introduction of a series of reforms that ended around 14 years later with a full graduation from the IMF program as a sound and stable economy with minimal economic distortions.
In this context, the debt-to-GDP ratio dropped from almost 180 percent in 1990 to around 87 percent in 2004. While budget deficit-to-GDP fell from 16 percent to less than 3 percent during the same period. The lessons to be learned here are that reform isn’t an overnight process, it has to tackle both sides of the market and, most importantly, it has to show some breakthrough in main economic indicators.
Following the negative ramifications of both the 2008 economic crisis and the so-called Arab Spring, Jordan decided in mid-2012 to embark on a new economic program by signing up to a stand-by arrangement with the IMF. Under the agreement, the country pledged to apply a few reform measures in order to receive $2 billion in debt from the IMF and another $2.5 billion from the international market.
The program undertaken by the Jordanian government and the IMF focused mainly on demand management policies that revolved around electricity cost recovery, expenditure cuts, tax restructuring, fuel subsidy phase outs, the introduction of wide ranging government non-tax revenues, and a public sector recruitment freeze. The supply side reforms in the program were briefly mentioned in a slogan style that said: a better investment climate for a better economic growth.
Three years on, the government discovered that its efforts were non-evolutionary, non-inclusive or comprehensive, and most importantly, saw no substantial improvement in distortions in the public debt or budget issues. The gross debt-to-GDP ratio rose from less than 70 percent in 2012 to around 90 percent in 2015. The budget deficit decreased from 14 percent to around 6 percent. But this wasn’t down to an improvement in government revenues or the cost cutting policy, but rather it was due to an increase in foreign assistance that has come to represent almost 15 to 20 percent of the total public revenues of the budget. A reform that leads to exacerbating the main macroeconomic indicators is a limp, skewed, and distorted type of reform.
However, after three years of insisting on sticking to this approach, the government finally admitted in a meeting with local newspaper editors that it made a mistake and that it needed to focus on the supply side of the economy and to consult with the stakeholders. It conceded that lessons had indeed been learned and a better economic environment was now in the offing. One cannot imagine that high profile policy-making positions could be an on-the-job training process, let alone that economic reform could be an experimental exercise, a training course, or on-the-job experimental path.
This has led us to our current position where growth has started to drop again, public debt isn’t improving, jobs aren’t being created, and investment isn’t anywhere better than before. The only issue today is whether we can trust that the coming years are going to be better given that the on-the-job training process has almost ended? That depends if policymakers have learned their lesson or if they’re just filling time until they finish their term in office.