Mittblc t 209 57 Public Disclosure Authorized Norti, AfricA No. 14 -- May 1995 INVESTMENTEFFICIENCY, HUMAN CAPITAL & MIGRATION A PRODUCTivITY ANALYSIS OF THE JORDANIAN ECONOMY Public Disclosure Authorized by Gaston Gelos Yale University, Department of Economics Discussion i Document Public Disclosure Authorized Paper de Series Travail Dia=ton papas ae not toamwjpubMcadois of te Woeid Sanhc They pismfi pm_miwy and atmunpoIatd ruinht of wnixU an~a.ad nuewh. Ctdo is 'b,d~ to mcwg- dimaoi cffnn ci~n wid tt umeof the Pr shouid take ascouat wf it o'von dctar. The kidkig awdconciwa of th Paper am ent si tAss*nof lN stWar wi siouid note o- urbuwd to Ui Wo4d Ban. idff otuarIzmdons. or mwnb*m*o of it Bd - ot x_ Oi fm or eou nL Public Disclosure Authorized L CW^oPY -S .t,,. e _ .\ x, ,%,,,,~~~~~~~~~~~~-4,, :NVESTMENT£FFICINCY. : HUMAN C : A : : :: A'~:PRODUCTIVIT ANALYSIS OF THE: JODNA ECONOY. ~~~~~~~~~~~~~~~~~~~~~~~~~~~...... .. -.....-.. ...... ..-. --.... ;.;.;........... ... _.:.;.;... .... :;:;-..;;. by Gaston Gelos Yale University March, 1995 This paper originatedduring a summerat the WorldBank. I am particularlygrateful to Chang-PoYang and Harald Uhlig for their encouragementand suggestions. I also would like to thank Ishac Diwan, Ashutosh Dubey, Jesko Hentschel, Francesco Mongelli, Nouriel Roubini, Xavier Sala-i-Martinand Radwan Shaban for helpful comments. All errors remain mine. Table of Contents 1. Introduction 2. The Jordanian Economy - An Overview 2.1 Salient Features of the Jordanian Economy 2.2 Economic Performance Over 1970-92 3. Productivity Change 3.1 Investment Efficiency 3.2 Labor Productivity 3.3 Total Factor ProductivityAnalysis 3.3.1 The Standard NeoclassicalApproach 3.3.2 Inclusionof Human Capital 4. Explanations 4.1 DeterioratingInvestment Quality 4.2 The Labor Flows 5. Policy Implications 5.1 hIproving the Efficiencyof the FinancialSector 5.2 Reducing the Role of the Public Sector and Enhancingthe Business Environment 6. Conclusions -2 - 1. Introduction Recently,economists have become increasinglyinterested in studying the growth experience of individualcountries in order to test the implicationsof the endogenousgrowth literature and to complementthe insights gained by large cross-countryregressions. This approach was pioneeredby Alwyn Young (1991). This paper makes an attempt to contributeto such empiricalinvestigation of growth processes by studyingthe case of Jordan, a small open economy that experiencedhuge migration flows and inflows of foreign funds during the past two decades. The aim is to identify the sources and patternsof productivityand growth of the Jordan economy,giving special attentionto the effects of labor flows and the quality of investment. The results are interpretedin view of the role of human capital, migration and investmentexternalities in modern growth analysis. Given the chances for the region brought about by the peace process, the implicationsfor the design of future policies are particularlyinteresting. The period examined is that between 1970 and 1992. The natural year to start with may have been 1968, followingthe war and the occupationof the WestBank. However, for the two years immediatelyafter the war, the availabledata for the WestBank was not consistent with with that of later years. The structureof the paper is as follows: after giving a brief descriptionof the salient features of Jordan's economy and its performancein the last 23 years, various productivityand investmentindicators are examined. In the main part, a total factor productivityanalysis is carried out, the validity of the basic neoclassicaland simple endogenousgrowth models for the Jordaniancase is evaluated,and explanationsfor the results are given. A more detailed sectoral analysiswould have been insightful,but could not be pursued becauseof lack of adequatedata. The analysis reveals that Jordan has a poor productivityrecord, and that productivitygrowth was negative during the eighties. The result is somewhat surprising,since Jordan has made substantialimprovements in educationand infrastructure. Interestingly,human capital as measured by average schooling years multiplied by the size of the work force, does not help to explain the productivityresidual. One of the main results of this paper is therefore that correctionsto the standardmeasurement of human capital are indispensablefor those countries that experiencelarge migrationflows. Given the salient characteristicsof Jordan's economy,this paper concentrateson two major explanationsfor stagnantl decliningproductivity: first, it is argued that the large amountsof foreign aid and remittanceswere not used efficiently,and that investmentquality declined. The view that foreign capital can weaken rather than strengthenan economy' is thus supported,to the extent that "strengthening"is understoodas an improvementin productivity. Second, the paper claims that the outflowof skilled Jordaniansand the inflow of unskilled workers from abroad formed an obstacle for productivityimprovements. Due to lack of detailed information,only incompleteempirical evidence for this hypothesiscan be given. A result which is interestingfrom a theoreticalperspective is that simple endogenousmodels with investmentspi}lovers do not offer an adequatedescription of the Jordanianexperience. The forces driving growth and productivityare of a more subtle nature. From a policy point of view, Jordan could enhance its economic performanceand adjust to the new environmentby concentratingefforts on improvingthe allocationof resourcesin its economy, particularlythrough a further developmentof its financialsystem. 'see Lavyand Sheffer(1987) -3- 1. Introduction Les economistes s'interessent depuis peu de plus en plus a la croissance des pays afin de tester les implications des ecrits sur la croissance endogene et d'approfondir les connaissances qu'ils ont retirees d'importantes regressions transnationales. Alwyn Young (1991) a et en ce domaine un precurseur. Le present rapport tente d'apporter sa contribution a la connaissance empirique de la croissance en etudiant la Jordanie, petite economie ouverte qui a connu au cours des deux dermires decennies un fort courant d'emigration et un important afflux de devises. Le but est de mettre au jour les sources et les formes de productivite et de croissance dans ce pays en s'attachant tout particulierement aux effets des flux de main d'oeuvre et a la qualite de l'investissement. Les resultats sont interpretes en tenant compte du r6le des ressources humaines, des migrations et des facteurs extemes intervenant dans l'investissement selon I'analyse moderne de la croissance. Compte tenu des chances que le processus de paix donne a la region, les consequences qui en resultent pour la conception des politiques futures sont particulierement interessantes. L rapport porte sur la periode 1970-92. Il euit et normal de demarrer l'etude en 1968, au lendemain de la guerre et de l'occupation de la rive occidentale du Jourdain. Cependant, les donnees sur les deux premieres annees de l'apres-guerre ne sont pas comparables a celles des annees ulterieures. Apres avoir donne un bref apercu des specificites de l'economie jordanienne et de ses performances au cours des 23 dernieres annees, le rapport passe en revue differents indicateurs de productivite et d'investissement. I1 analyse la productivite globale des facteurs, souleve le probleme de l'applicabilite a la Jordanie du modele simple neoclassique de croissance endogene et rend compte des resultats. Il euit et interessant de pousser plus avant l'analyse sectorielle mais les donnees faisaient defaut. L'analyse revele que la Jordanie se signale par une productivite faible qui, de surcroit, est allee d6clinant tout au long des ann6es 80. Le r6sultat est quelque peu surprenant dans la mesure oii la Jordanie a fait de sensibles progres en matiere d'6ducation et d'infrastructures. Fait interessant, les ressources humaines mesurees par la durde moyenne de la scolarit6 multipliee par le chiffre de la population active ne permettent pas d'expliquer la faiblesse de la productivite. Le rapport en conclut a la necessite de revoir le mode d'evaluation des ressources humaines dans les pays d'emigration. Compte tenu des principales caracteristiques de l'economie jordanienne, le rapport avance deux raisons principales pour rendre compte de la productivite stagnante, voire declinante. Primo, il fait valoir que l'aide etrangere et les transferts des travailleurs emigr6s n'ont pas et utilises au mieux et que la qualite de l'investissement a baisse. Ainsi, il donne quelque credit a 1'idee selon laquelle les capitaux etrangers pourraient non pas renforcer mais affaiblir une economie 1, le renforcementetant ici entenducomme une am6liorationde la productivita. Secundo, le rapport voit dans 1'emigrationde la main d'oeuvre qualifi6eet l'immigration de travailleurs non qualifies un obstacle a l'amelioration de la productivite. Le manque d'informations d6taill6esne permet toutefois pas d'etayer pleinement cette hypothese. Le rapport debouchesur une conclusioninteressante du point de vue th6orique: les modeles simples de croissanceendogene avec les retombeesdes investissementsne rendent pas compte veritablementde l'evolution de l'economie jordanienne. La croissance et la productivit6ob6issent A des forces qui sont de nature plus subtile. La Jordaniepourrait, par une meilleureallocation des ressourceset un d6veloppement de son systeme financier, ameliorer ses resultats economiques et s'adapter au nouvel environnement. 1. Voir Lavyet Sheffer(1987).