Wednesday, October 3, 2007

Iraqi refugees and the economy

Jordan Times - 02/10/2007

(MENAFN - Jordan Times) Yusuf Mansur

Jordan has offered refuge to many Iraqis, several waves of them as a matter of fact. The last, whose size is yet to be officially disclosed, ranges from 250,000 to 1.25 million.

The last influx of Iraqis, a brutal consequence of the disastrous war which, according to many, is still going on, has been subject to intense debate and scrutiny, especially after the downwards slide of the stock market, a fall in FDI inflows and deflation of real estate prices.

Should Jordan be compensated for hosting Iraqis? The answer is worth a "billion dollars". Below I examine several of the so-called "adverse" effects of the Iraqi influx on the economy.

In recent months, there were claims that Iraqis have been behind the inflation witnessed in Jordan. The basic idea is that a sudden increase in population leads to a larger consumer base and, consequently, a greater demand for goods and services. However, in any well-functioning economy, such an impact is short-lived because markets react by expanding production, greater employment opportunities are generated and prices go back to normal. Hence, the impact of the sudden influx should have been temporary.

When prices rise and become sticky downwards - refuse to fall - the outcome is due to inherent market deficiencies: a small, non-reactive production base, obstacles to business creation and expansion, monopolistic practices, lack of information and information asymmetries in markets, and governmental controls and policy failures - to name a few.

Since the surge in demand cannot be satisfied domestically and can only be met by greater imports, with no visible chances for local supply responses, the shortage is satisfied by more imports and rising prices that persist in the long run.

Has this been the case in Jordan? There is evidence that the business environment has not improved but deteriorated in the last three years relative to the rest of the world.

Jordan's ranking in the Doing Business report of the International Finance Corporation dropped from 73 in 2005 to 78 in 2006 and 80 this year. A lean, proactive business environment would have been better able to respond and growth would have been beneficial.

Moreover, monopolistic practices are present in almost all commodity markets in Jordan, which also explains why monopolists, once faced with the possibility of a price hike, tend to maintain the new prices under the pretext that there are shortages and increased demand. This phenomenon is present even among the small grocery stores in villages where locational monopolies allow the seller to persist in imposing price hikes.

Empowering the Competition Directorate and making it an independent body, as the National Agenda suggested two years ago, would have helped solve this homegrown dilemma.

The horde of quick-fix policies of on-off selective price controls, and the rising energy bill that was translated into higher energy costs to producers and consumers contributed to rising the prices of industrial products and real estate - rent of apartment buildings and offices - especially when the heating and services bill were included in the rent contract.

Ministers resigned or let go from the economic team as a consequence of their disagreement with a vision or its implementation (if only it had existed). The economy has become more confused by short-nosed, unstudied, quick to the draw policies and a long-term vision seems to be nowhere in the offing. One fails to see the connection between the Iraqi refuges and such a litany of policy failures.

A more probable and direct cause for the increase in inflation is the falling US dollar, to which the Jordanian dinar has been pegged since 1995. This has caused imports to become more expensive. Moreover, the shortages in commodities worldwide have had an impact on rising commodity prices in Jordan.

The rise in fuel prices has also contributed to a rise in production costs. The removal of subsidies - the most recent of animal feed - led to increased imports, as local production cannot compete with relatively cheaper imports. To this add the frequent increases in the sales tax and its spread to necessary commodities, and the picture of inflation becomes much clearer.

All these conditions at play exercised tremendous upwards pressure on prices, which caused inflation to rise last year.

Did Iraqis compete with Jordanians for jobs in the labour market? With only 1,700 work permits issued to Iraqis, one cannot claim that Iraqis drove Jordanian workers out of the labour market. Official estimates show that the unemployment rate has not been affected significantly either way. The Ministry of Labour reported a 1 per cent lower unemployment rate than the Department of Statistics, but both figures happen to be the lowest in five years.

Based on these published figures, it seems the influx of Iraqis has, to the contrary, helped an upturn in the economy - not a downturn as some officials and analysts have claimed.

Could unemployment have dropped further without the Iraqis in the country? Not likely, since Iraqis could not work in Jordan.

Did the economy grow with the Iraqis influx into Jordan? It grew by 8.3 per cent in 2004, 7.4 per cent in 2005, 6.3 per cent in 2006 and is expected to grow by 5.9 per cent in 2007, according to the Central Bank of Jordan. These rates are much higher than the rates of 2002 and previous years, which were around 3 per cent.

Some of the savings and injected wealth of Iraqis may have been behind this growth. Activities pertaining to the Iraqi market, completely decimated in the aftermath of the war, may have also contributed to the rise in economic activity in Jordan - the gateway to Iraq.

Did Iraqis use Jordanian public schools? It was only last month that the Ministry of Education announced that it would allow Iraqi children to attend public schools. Besides, 45 per cent of the Iraqi children's families opted for private schools (a rate that is close to that of Jordanian children) since public schools are overcrowded and dilapidated, and had been so long before the 2003 war on Iraq.

Now let's consider infrastructure. Jordan needed to overhaul its infrastructure for years. One ministerial Cabinet after another was saddled with an inflexible budget. The National Agenda noted in 2005 that infrastructure became a far second on all Cabinet agendas. Putting out fires, reactive and operational measures became the name of the game, instead of focusing on strategic thinking and future development. Furthermore, electricity, water and telephony have been, for all purposes, privatised and the subsidies provided them are too paltry to note.

Government revenues also increased significantly from visas and fines slapped on those who overstayed without legal papers, and from the rise in sales tax and customs revenues, due to increased consumption. Businesses owned by wealthy Iraqis have also contributed to the budget in stamps and fees, which make up one third of the budget. The government, at the same time, became the recipient of more aid immediately during and after the last Iraq war, especially from the US, more than it had during all the previous decade.

Did the Iraqis cause the speculation in the real estate and stock markets? Partially. Since Jordan exhibits many of the ills of a neoliberal economy, it too was driven by the speculative global trend that caused real estate markets to balloon throughout the world in recent years.

The surge in real estate prices would have happened with or without the Iraqi purchase of land and property, which made up around 3 per cent of all real estate activity. Again, had the productive base in Jordan been larger, the profits realised from such sales would have been poured into the economy and produced other goods and services. And, had we truly improved the business climate and the competitiveness of the Jordanian economy in recent years, the Iraqi refugee influx would have been an even greater boon for Jordan.

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