A recent statement by the US Ambassador to Amman stressed the United States’ continued role, mainly in the form of foreign assistance, to Jordan’s economic reform program. However, with acute budgetary pressures besetting the United States, Japan, France and Germany, it is virtually a fiscal certainty that much of the new aid flow will dry up in the near future.  Jordan Business observes the ramifications of Jordanian overdependence on foreign assistance.

Driving around the mass construction site that West Amman is turning into, it is perhaps easy to forget that Jordan is a middle-income class country, heavily dependant on foreign investment and aid for its economic development. According to David Schenke, a senior fellow at the Washington Institute for Near East Policy (WINEP) in the US, Jordan, on a per capita basis, is currently the second-largest recipient of US foreign aid, only behind Israel.

Jordan has for decades depended on the inflow of capital aid to support its economic development and restructuring efforts. While Saudi Arabia is currently Jordan’s biggest provider of funds, the United States has been a steadfast provider of foreign assistance, with overall contributions totalling over $7 billion, divided between economic assistance grants and military aid. A recent press conference by US Ambassador to Jordan, David Hale, on the occasion of Independence Day, stressed the US’s commitment to continue with the support and assistance of Jordan’s reform initiatives and humanitarian needs that it has provided since 1951, especially in relation to the influx of Iraqi refugees. This to many was the mouthpiece for different sectors of society, including top government, reflecting anxiety over the turning tides of fortune that has accompanied the increase in immigration of Iraq’s most vulnerable into Jordan.   

On January 21, Parliament released Jordan’s budget for 2007, earmarked at $6.1 billion. While Parliament’s initial recommendations stressed the need to decrease Jordan’s dependence on foreign aid, a staggering 15% of the 2007 budget is comprised of aid from Saudi Arabia and the US.  The distortion that overdependence on aid can incur is clear when foreign assistance is excluded from the equation.  In this model, the budget deficit actually accounts for 8.4% of GDP, massively above the IMF’s recommended limit of 3% of output. Coupled with the relative fragility of the Kingdom’s political structures, overdependence on foreign assistance merely promotes an unsustainable semi-rentier economic model instead of the adoption of much needed structural reforms.

Aid Dictated By Horizons
Unlike some of our oil and resource-rich neighbors, Jordan is nearly bereft of natural resources and must thus rely on its geopolitical location, skilled workforce and its relatively liberal economic environment as its selling points. Despite a long period of economic restructuring, which began in earnest with the advent of the IMF-backed economic reform program in 1989, Jordan has continued to focus much of its diplomatic, economic and political efforts towards securing funds from without, as opposed to implementing structural reforms needed from within.

Apart from the hindrance that overdependence on aid poses to genuine economic reform programs, it is the see-saw effect with which it is administered that makes the dependence on such a volatile source of funds an even more precarious course. Levels of American aid in particular have fluctuated in response to Jordan’s political horizon at a particular time; it was virtually cut off in 1991 due to Jordan’s sympathy for Iraq during the Gulf crisis, and was boosted in 2003 in response to the Kingdom’s “major non-NATO ally” status in the “War on Terror.” Thus, including foreign assistance in Jordan’s forecasted economic activities leaves many initiatives on very shaky ground indeed.
 
Benefiting From The US
In 2003, Jordan braced itself for what could have been an economic calamity as it stood on the sidelines overseeing its two biggest trading partners, Iraq and the US, go to war with each other for the second time. As exports to Iraq collapsed, total export revenues reportedly rose by around 11% in 2003, largely due to an increase in demand for goods manufactured in qualifying industrial zones (QIZs) and destined to the US. Benefiting from closer ties with the US is not only driven by rent-seeking for financial assistance, but there is no doubt that it forms a great part of our relationship.

However, for Amman’s sturdy relationship with Washington to truly trickle down to the domestic economy, key benefits must be pursued, including bolstering the move away from a state-dominated model of the economy. The stumped reality is that the US appears to dangle the aid carrot in front of Jordan long enough for it to forget its budgetary and institutional strains, especially since the amassing of Iraqi refugees within its borders.

The Cost To Jordan
As the war in Iraq progressed both in scale and brutality, Jordan, among three other countries, was, if only through geography, compelled to play host to refugees who initially began to quietly cross the Iraqi-Jordanian border. The preliminary perception was one of indirect fortune out of the misfortune of others. Among the first Iraqis to flee their country were of the professional classes and businessmen who personified the promise of investment and massive amounts of disposable income, allowing them to make positive contributions to their new host. While retrospective criticism is easy, it has become increasingly clear that there was no sound public policy scheme among top strategists within the Jordanian government to accommodate a continued influx of Iraqi refugees. The fact that no accurate recordkeeping for the number of Iraqis allowed into the country is conceivably the biggest indication of the absence of a medium, let alone long-run plan to accommodate this humanitarian crisis.

What initially was perceived as an economic blessing turned into sour grapes in less than four years. Inflation is on the rise, presently up to 6.25% according to official estimates, with most believing it to be more around the 10% mark. The arrival of hundreds of thousands of Iraqis has also presented the state with seemingly insurmountable burdens on government institutions, especially the education and health sectors.

During the 2005-2006 school year, Jordan’s schools hosted 60,000 Iraqi children, and yet many still flounder in the legalities of access to education. This has led to an increase in pressure on our national economy, the necessary diversion of funds towards bolstering the country’s security apparatus, and an increase in the cost of living for all Jordanians, especially the most vulnerable categories in society. It has also led the Jordanian Government to adopt a less humanitarian stance towards Iraq’s refugees who, according to columnist Noah Baker Mill, “entangles Iraqis - even those in life-and-death situations - in bureaucratic security checks and arbitrary quotas.”

Aid directed constructively at capacity building and shoring up struggling institutions within the Jordanian economy is unequivocally a force for good. However, merely injecting the economy with foreign capital inflows without integrative initiatives to help further both Iraqi refugees and Jordanian productivity will merely compound the situation and lead to further rampant inflation and a deterioration of the overall situation.

A New Paradigm For Assistance
At a UNHCR conference in Geneva last April, both aid agencies and governments pledged support to help host countries, including Jordan, Syria, Lebanon and Egypt, deal with the massive refugee influx. The United States has contributed 30% ($18 million) to UNHCR’s Iraq Appeal of $60 million, and total donations have so far reached a total of $70 million, with another $10 million pledged from the international community. The international community must meet their humanitarian and legal responsibilities to those who have fled the tragedy and violence.

Strengthening capacity and Jordan’s institutional foundation will provide the nexus around which Jordan can meet its international legal obligation to protect refugees and simultaneously prevent the floundering of the economy. Therefore, aid must be geared towards strengthening national authorities, the promotion of self-reliance and durable solutions through the strengthening of educational and health institutions that will benefit both Jordanian nationals and Iraqi refugees alike. The nagging question, however, is whether US resource transfer is contributing to Jordan’s nascent socio-economic and political transformation, or whether it is targeted at stabilizing the status quo through the further empowerment of the state. 

A new paradigm for assistance must take shape and requires a partnership framework involving host and donor governments, NGOs, civil society and developmental agencies, as well as the main stakeholders themselves. Jordan needs to move from being merely a recipient of tied-aid to an active director of the aid it receives. A system must be initiated where aid is funnelled into policy frameworks that move it away from its 60-year overdose on foreign assistance.

The Decentralization Of Aid
Donor support for reconstruction and reform to southeast Europe after the Dayton Agreement of 1995 was tailored to each country by taking into account the development phase that each country was passing through. Until 2005, the envelope of overall assistance to the region was in the order of $7.2 billion, almost exactly the amount of aid Jordan has received through the US aid program over the years. Yet, there is a great difference in the way aid was administered and, therefore, the structural outcome that transpired.
In the case of southeast Europe, donors recognized that sustainable economic development, social inclusion and regional security, pivoted on the strengthening of institutions, governance and accountability. This, donors believed, would increase a self-sustaining mechanism through much needed economic and fiscal reforms, investment and promotion of private sector growth. Analogous initiatives need to be successfully extrapolated onto the Jordanian economic scene if Jordan hopes to successfully wean itself off foreign assistance. Merely using aid to fund current consumption and “showcase” infrastructure projects that have little impact in raising living standards will not inspire imperative self-reliance and self-sufficiency.

Resources must be aimed at building local agencies, enhancing coordination and promoting government accountability, instead of attempting to strengthen and maintain external relations with donor countries preoccupied with their own security and economic agendas. Decentralized cooperation and assistance programs that target local NGOs and the private sector will yield constructive results and provide viable mediums for positive change in the direction of liberalized economies and societies.

Moving Forward
There is no question that the US and the international community need to step up to the plate and provide significant support to Jordan, Syria and other countries who have borne a refugee burden not of their own making. On the other hand, Jordan needs to be aware of the dangers of relying on foreign assistance in the form of tied, bilateral aid. The intrinsic nature of bilateral aid is that it is likely to be oriented toward the donor’s economic and strategic interests, with donor countries taking advantage of their direct control of the funds they are bestowing in return for implicit or explicit “exchange conditions.” Many, for example, believe that Jordan’s quick accession to the WTO and its nebulous effects on the economy are the result of the dynamic of quid pro quo in return for guaranteeing US assistance.

Changing this situation is going to be a difficult and complex endeavour. The security of Israel and the concomitant stability of present Jordanian institutions will continue to color US foreign policy towards Jordan. Against this background, US aid to the state will remain an important source of capital aid to the Kingdom, but it is up to our policy makers and key government strategists to focus more of their energies and resources on securing foreign direct investment from these countries, rather than merely rent-seeking through diplomatic efforts.

As with other beneficiary countries, a key source of change is better accountability in public spending, as the windfalls from aid inevitably accrue to governments. This will require more targeted, context-sensitive aid programs; directing funds to information and communication technologies that enhance labor productivity, increase broad-based economic growth and supporting legal and regulatory reform. 

Jordan can certainly make substantial progress at bringing down its budget deficit and easing its reliance on foreign aid by attracting more comprehensive FDI deals and preferential oil price agreements with its regional neighbors. However, Jordan will continue to require development assistance that prioritizes the achievement of human development goals and a self-reliant economy and society. How successful Jordan is depends on how well our policymakers perform their balancing acts.