Global Economic Crisis: Mixed Forecast for Jordan and Syria

December 1, 2008

Editor’s Note: In the fourth in a series of analyses, “Food, Fuel, and Finance: How Will the Middle East Weather the Global Economic Crisis?”, the Middle East Youth Initiative interviews two prominent regional economists, Taher Kanaan and Nader Kabbani, on the impact of the global economic slowdown on the economies of Jordan and Syria, respectively. Edited transcripts of the two conversations follow.

Interview with Taher Kanaan[1]

Navtej Dhillon: How was the Jordanian economy performing before the beginning of the international financial crisis?

Taher Kanaan: Prior to this year, Jordan’s performance had been bright. Economic growth was 2-3% higher than population growth. In 2008, however, we began to see higher inflation, which jumped up to nearly 12% and has led to significant pressures on consumers, especially for those in the lower-income bracket. This was due largely to the increase in oil and food prices, however, there continues to be structural issues that have reinforced these problems, including lack of competitiveness in the private sector.

Dhillon: Jordan has experienced a significant increase in housing prices in recent years. What has driven this housing boom? What has been the impact on young people seeking housing?

Kanaan: Actually, Jordan has experienced two housing booms that involve similar factors. During the first Gulf war, the return of Jordanian workers from the Gulf triggered a rise in housing prices that lasted until 1995. Since 2003’s U.S.-led invasion of Iraq, we have seen a similar boom, driven by the large number of Iraqi immigrants investing in property. It has also been bolstered by high population growth and the increase in workers’ remittances during the regional oil boom. Jordanians working abroad favor investments in real estate over investments in other areas because they can easily manage these investments from abroad.

While rising prices have made it more difficult for young people to afford housing, access to mortgage lending has improved significantly in recent years. Ten years ago, we started working with banks encouraging them to establish mortgage financing and refinancing. In the recent boom, it has been possible for Jordanians to access 10- to 15-year mortgages that, in turn, have fueled greater demand for housing.

Dhillon: In terms of employment, what have been the biggest challenges for Jordan in recent years?

Kanaan: While unemployment has declined over the past two years, it remains high at about 12% with youth unemployment twice this rate. Nearly 53% of all jobs created in Jordan have gone to foreign workers – this despite significant job creation in recent years and the government’s efforts toward systematic educational reforms. There continues to be a significant skills gap between young workers and the private sector job market. Furthermore, Jordan’s young skilled workers are often drawn to the Gulf economies instead of staying in Jordan, causing an inevitable brain drain.

Dhillon: In your view, what will be the longer-term impact of the international economic crisis on Jordan?

Kanaan: We have evidence of a mixed impact on Jordan’s economy. First, while prices of imports – particularly food and oil – have been high this year, prices are coming down. This should have a significant, positive impact for Jordan’s economy unless monopolistic forces within Jordan’s private sector are able to manipulate prices. In regard to exports, Jordan’s chief exports (potash, phosphates) are needed to produce fertilizers to meet rising agricultural demand and pharmaceutical exports are likely to get a boost in the current international environment as more consumers move to generics instead of brand names. Similarly, Jordan’s tourism sector may be positioned to attract more tourists as higher-end tourism decreases. Yet, at the same time, the number of new migrants will decrease and workers’ remittances will likely decline to regular levels after oil prices spike. These outcomes all suggest mixed but positive prospects for Jordan.

Interview with Nader Kabbani[2]

Dhillon: Syria is not closely integrated with global markets, and yet recently the country has faced a number of economic challenges which have manifested in high inflation. What has been behind the increased inflation?

Nader Kabbani: The major problem facing Syria has been high inflation, which at the moment stands around 15 percent. High inflation has been triggered by a number of factors: some related to volatility in the global economy and others purely local shocks. High oil prices have directly affected ordinary Syrians, and the effects of high oil prices have been compounded as the government has moved towards reduction in fuel subsidies. The influx of Iraqi refugees has had a direct impact on pushing up housing and rental prices in cities like Damascus. Syria also faced a drought that contributed to the spike in food prices. These have been some of the main drivers of inflation. Whilst wages have increased in the public and private sector there is a widespread sense that these increases have not matched the increase in the cost of living.

Dhillon: Now, in light of the recent global slowdown, is Syria set to accrue short-term benefits?

Kabbani: Well, a drop in food and fuel prices provides relief to both individuals and government budgets. So this is a positive short-term impact of the economic slowdown. But, the question is what happens after these short-term gains. The main challenge is that Syria is not integrated into global export markets. Financial markets are not exposed to the west. Should the international economic crisis continue, the Syrian economy’s transition towards greater integration with the global economy will be a lot harder. Plus, if the economic crisis lingers, Syria will be adversely impacted in two ways. The first is a likelihood that remittances will start to shrink, and second, the price of land could also drop.

Dhillon: Before the crisis, Syria was undertaking reforms to move towards a more private sector-oriented economy, as the country is set to become a net oil importer. Does the risk of deregulation, as seen in the U.S. and European countries, embolden groups that may stand against market reforms? Aren’t we already seeing the reform agenda being sacrificed in the face of popular economic discontent? For example, one way the government has responded to higher costs of living is by increasing public sector wages as well as mandating increases in the private sector. How effective is it to undertake a permanent adjustment to temporary shocks since these wage increases cannot be rolled back and, to some extent, go against private sector-led reform?

Kabbani: I think the anti-reform voices will have a louder voice. The Syrian government has focused on pushing through labor market reforms, deregulating industries such as cement and airline. Recently, private banking has opened up in the country. But as anti-reform voices harden, it is important to keep in mind that in Syria, deregulation has a long way too go before it poses severe risks. The debate in the country should not be about deregulation or regulation but smart regulation. Thus I am optimistic that reforms will continue, as they are critical for the future of the Syrian economy.

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[1] Taher Kanaan is managing director at the Jordan Center for Public Policy Research and Dialogue and author of forthcoming Middle East Youth Initiative Working Paper on youth inclusion in Jordan.

[2] Nader Kabbani is director of research at the Syria Trust for Development and author of Middle East Youth Initiative Working Paper “Youth Exclusion in Syria: Social Economic, and Institutional Dimensions,” (December 2007).