Don't Rush to Invest in Jordan
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Andy Serwer writes today on the Fortune magazine website an article entitled “Can Jordan Build on its Relative Success?” Even the title is a give-away of modest expectations: “relative success”? The article lists some of Jordan’s undeniable achievements over the past seven or eight years: free trade agreements with the U.S. and the European Union that have caused exports to soar, some measure of macroeconomic stability, continued GDP growth even in the current economic crisis, improvements in education and health care, and reform and liberalization of several key areas of the economy. Having spent quite a lot of time working in Jordan, I agree with Mr. Serwer’s assessment of Jordan as the most secure and pleasant place to live in the neighborhood – in which he includes Egypt, Saudi Arabia, Iraq, Syria, Lebanon, and Israel – though Beirut’s nightlife and the topless sunbathers in Tel Aviv outshine any of Jordan’s more sedate attractions. But it is easy to overstate the case.

I have reservations about the World Bank’s “Doing Business” rankings and the methodology they use, but it’s worth noting that the 2009 “Doing Business” report ranked Jordan 101st out of 181 countries surveyed in overall ease of doing business, compared with 94th the previous year, just behind Zambia (100th) and ahead of Sri Lanka (102nd). Compared to its neighbors, Jordan beats out Egypt and Syria, but lags behind Lebanon, Kuwait, Israel, the United Arab Emirates, and Saudi Arabia. Some of the more problematic indicators for Jordan are: “starting a business,” “protecting investors,” and “enforcing contracts,” none of which augur well for the country’s prospects of attracting international investment. If you’re not too bothered by not being able to drink or wear shorts in public, Saudi Arabia (ranked 16th) is a far better place to do business.

The World Economic Forum’s 2008-2009 Global Competitiveness Index highlights Jordan’s “inefficient government bureaucracy,” “tax regulations,”  “inadequately educated work force,”  “restrictive labor regulations,” “inadequate supply of infrastructure,”  and “poor work ethic in the national labor force,” as the most damning factors – inflation formerly headed the list, but Jordan this year has brought the official rate down from 21% to 0.5%, for which it does deserve accolades.

Andy Serwer himself highlights the big infrastructure problems: lack of water – Jordan is the fourth poorest country in the world in water resources – and lack of energy – Jordan imports 965 of its energy needs – but sees the answer in a couple of multi-billion dollar water projects and in uranium, of which the country apparently has a lot. Enough, at least, to build its own nuclear reactor with French assistance and sell some yellowcake to pay for at least a portion of the cost of the water projects. Of course, if it were that simple, Yemen and Niger would be among the world’s most prosperous countries.

Jordan is certainly better governed than those unfortunate countries, but its relative stability and prosperity mask some worrying undercurrents. Jordan, like most of its neighbors, is a tribal country. As a foreigner with limited knowledge of Arabic, I couldn’t begin to explain the tribal dynamics, but suffice to say that the tensions are so great that the Cabinet tends to be reshuffled every twelve months or so to make sure no group feels slighted. This makes coherent and consistent policy hard to achieve. On top of that, nearly half the population is Palestinian, which makes for divided loyalties. Then there are the Iraqis. Jordanians will tell you a million Iraqis now live in Jordan, though the real figure is closer to half that, but it’s still a lot in a country with only six million inhabitants.

The numbers themselves mislead. Most of the surge in foreign direct investment and exports occurred in the early part of this decade, mainly as a result of the U.S.-Jordan-Israel Qualifying Industrial Zones program, which provided quota-free and duty-free access for garments and textiles made in Jordan with at least 11% Israeli content. The high GDP growth rates in recent years (9.6% in 2008) seem largely unrelated to Jordan’s prowess in developing the competitiveness of its economy and are more likely the result of an influx of people and dollars tied to America’s war in Iraq. How soon this bubble deflates depends far more on the speed of America’s disengagement from Iraq than on anything – positive or negative – Jordan’s government may do.

Investing in Jordan is hard for individual American investors. Of the Middle East funds available in the U.S., Wisdom Tree Middle east Dividend Fund (NASDAQ:GULF) has a 6.7% Jordan weighting. T. Rowe Price's Africa and Middle East mutual fund (TRAMX) allocates a little over 4% to Jordan. Other funds, including SPDR S&P Emerging Middle East & Africa ETF (NYSE:GAF) and Power Shares MENA Frontier Countries ETF (NASDAQ:PMNA) have unspecified and variable Jordan weightings.

Disclosure: Long TRAMX

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Posted 08-05-2009 3:59 PM by Anonymous
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