Executive summary
Jordan’s economy is on the road to steady recovery from a comparatively moderate GDP contraction of 1.6% in 2020, reflecting the timely policy response to the COVID-19 crisis by the Jordanian authorities. Nonetheless, the pandemic has amplified existing structural challenges – at the forefront of these the dramatic number of unemployed youth and women, hastening the need to revitalise private investment for an inclusive and sustainable recovery. Already prior to the pandemic, stagnant productivity growth, labour market imbalances and reliance on a few industries have constrained sustainable development in Jordan. Furthermore, instability in neighbouring countries has cut off important trade corridors, leading to a significant drop in exports and a sharp increase in energy costs from imported fuels. These persistent domestic vulnerabilities, combined with global and regional shocks, have gradually eroded Jordan’s competitiveness and related foreign direct investment (FDI) performance over the last 15 years.
The challenge for Jordan is not only to restore and increase FDI levels, but also to enhance their alignment with sustainable development objectives to support the recovery. Notwithstanding an FDI stock-to-GDP ratio exceeding 80%, some of the sectors that attract the most FDI in Jordan – including real estate, construction and oil and gas-related energy – do not contribute the most to the diffusion of innovation, decarbonisation or the creation of quality jobs. Recent shifts in sectoral FDI trends might better match the country’s factor endowments. Jordan’s renewable energy sector, business, financial and health services, transport and logistics, and ICT have received relatively more FDI in recent years compared to manufacturing or construction. These sectors have a strong potential to generate economy-wide productivity gains, support a low-carbon transition and create better-paid jobs that can meet the aspirations of Jordanian youth and women, including the highly educated.
Jordan’s comparative advantages present clear investment opportunities in high-skilled tradable services and, to a lesser extent, in some manufactured exports such as chemical goods and apparel. Considering the export potential of sectors that attract FDI – and barriers to invest in these sectors – is important given the small size of the Jordanian market, large current account deficit and limited intra-regional trade integration. Opening of services could help achieve the key objectives of the Jordan Vision 2025 and other related national plans. Reforms in Jordan have largely liberalised the manufacturing sector but many service sectors remain partly off limits to foreign investors, including business services, distribution, infrastructure, and tourism, services where FDI has a strong potential to support sustainable development.
While it is crucial to attract FDI in sectors with high development potential, maximising the positive impacts of foreign firms’ operations is equally important for a sustainable recovery. During the pandemic, the proportion of foreign firms in Jordan that had to close permanently their business was six times lower than that of domestic firms. They were also faster in retrieving their pre-pandemic workforce levels – similar to foreign firms in other countries. Overall, foreign affiliates in Jordan tend to be more productive, pay higher wages, employ more women, and provide more training, but their performance premium is small and weaker than in other countries, particularly when it comes to green business practices. Furthermore, the potential for positive FDI spillovers is limited. Weak competition has created a large group of small, old and unproductive domestic firms that are vulnerable to foreign competitors and lack the capabilities to become their suppliers. Competition reforms should help reduce the high cost of doing business in Jordan – in particular energy cost – and allow for a more dynamic private sector that can better absorb the gains from FDI spillovers through a more efficient reallocation of resources and greater labour mobility.
Other legal and regulatory barriers influence negatively the impacts of FDI on sustainable development in Jordan. These include, among others, lengthy steps to start a business and access to finance (productivity and innovation), legal barriers and loopholes preventing women from participating in the labour market (gender equality), high levels of wage-setting distortions, weak collective bargaining rights and burdensome procedures to hire foreign talent (job quality and skills development) and challenges in accessing land for renewable-power projects (reducing carbon emissions). The government has introduced important reforms in all these areas, yet further efforts would ensure that the wider policy framework is aligned with the government’s goal of leveraging investment for sustainable development.
Implementing structural reforms at the intersection of investment and sustainable development requires clear whole-of-government strategies and strong co-ordination mechanisms. Jordan has a coherent framework of national strategies – at the forefront of these is Jordan Vision 2025 – providing overarching directions to support sustainable development, with consistent references to the role of private (and foreign) investment. Strategies are not always developed in a co-ordinated manner both within and across areas of sustainable development, however. For example in the area of productivity and gender equality, strategies are introduced without cross-referencing those of other state bodies. Going forward, Jordan could further consolidate the strategic framework for investment and sustainable development. Information on strategies and plans could be further centralised on a single platform and made easily accessible to all public and private actors involved in improving the impacts of FDI on sustainable development.
There are no mechanisms in Jordan exclusively dedicated to policy co-ordination in the area of sustainable investment. Other existing mechanisms nevertheless could take a more prominent role to ensure strategic alignment at high political level – notably through the Investment Council where the presence of the Minister of Labour is unique to Jordan, but also through other high-level bodies. The creation of a Ministry of Investment (MoI) in 2021 that is responsible for all investment-related affairs and bodies, including the Jordan Investment Commission and the Public-Private Partnership Unit, is a positive development in terms of improved co-ordination and streamlining of licensing procedures, but the reform is still at its early stages. At the implementation level, co-ordination of initiatives and joint programmes is largely absent in the area of sustainable investment. Involving MoI in policy design and delivery of other agencies – and vice versa – would help to bring in investor perspectives and develop more coherent and effective policy interventions.
Targeted policy interventions – financial and technical support and information or facilitation services – can help governments act on specific sustainability outcomes of FDI. In Jordan, the policy mix reflects the country’s most pressing priorities, as most policy instruments influence directly or indirectly the contribution of FDI to job creation and SME growth. Policy interventions also focus on incentivising investment in clean energy and on equipping workers with the right skills, although often for less-skilled jobs in the manufacturing sector. Gradually adjusting the policy mix to meet the emerging challenges and opportunities facing the Jordanian economy and adapt to evolving global FDI trends – along with other megatrends such as digitalisation and climate change – will support the emergence of a more inclusive, greener and knowledge-based economy in which the tradable service sector plays a greater role.
Tax and financial incentives are the most widely used types of policy measures to attract FDI in Jordan, but they are often not related to the actual performance of firms. The ongoing reform of investment incentives could further streamline existing tax incentives, opting for incentives related to sustainability criteria – one example is the recently introduced tax incentive conditional on hiring Jordanian women in the industrial sector – and progressively phase-out incentives supporting sectors with declining productivity or excessive carbon emissions. MoI should also play a stronger role in raising awareness about sustainability standards among foreign and domestic investors by strengthening the capabilities of the Jordanian National Contact Point, which would help fulfil its mandate of, inter alia, promoting responsible business conduct and due diligence in supply chains.