By : Ibrahim Rihani
Jordan Daily – In my previous pieces, I attempted to argue that the Jordanian macroeconomic configuration, through the interaction between fiscal and monetary policies, is set up in a way that prioritises monetary stability by maintaining the Dollar-Dinar peg over the potential for economic growth Jordan’s fiscal- monetary trap: Stability without solvency
I extended the same logic to the labour market, and how that configuration allows for a high unemployment, low investment equilibrium, which could explain the persistence of high unemployment in Jordan, rather than blaming it on microeconomic drivers such as a skills mismatch. This third piece further extends that logic to the following question: Why does Jordan struggle to industrialise?
To begin, and to add context, we must understand that countries primarily export tradeables. Tradeable goods refer to goods produced by companies that can be sold or exported into global markets. Unlike non-tradeable goods, which cannot be bought, sold or transported across international borders because they must be produced and consumed in the same location. Examples of tradables include crude oil, food, cars, and smartphones; they also include services that earn foreign exchange by serving non-residents, most notably tourism. While examples of non-tradeables are certain services such as restaurant meals or haircuts, real estate and public utilities.
The price of tradable goods and services is determined by both domestic and international demand and supply, while non-tradables are strictly influenced by domestic demand and supply. The natural and general implication is that non-tradable goods and services producers have more pricing power and are exposed to less competition than manufacturers of tradable goods. Extending that principle, less competition does not provide the same incentives for investments in innovation to boost productivity, as their position in the market is not threatened by foreign manufacturers who could enjoy potential comparative advantages, thus being able to aggressively price and drive out competitors. This forces domestic firms to consistently invest in innovative processes to remain competitive and compete globally in prices, or differentiate their products to decrease the number of substitutes.
In small open economies, such as Jordan, the size of tradable manufacturing could be the deciding factor between an economy that can scale and one that cannot. Domestic demand in small developing economies is, by definition, much weaker than demand in global markets, as domestic demand is limited by population size and purchasing power. For a firm to grow beyond that limit, dictated by domestic demand, it has to be able to scale internationally. When more firms can grow beyond that limit, the economy can generate more foreign reserves through exports, potentially at a pace that can support higher imports of energy, machinery, intermediate inputs and consumer goods. Therefore, tradeables are crucial for small-open economies. In this context, Jordan’s Economic Modernisation Vision is relevant insofar as it seeks to raise productivity through improvements in skills, infrastructure, logistics and the business environment, helping some sectors move out of low-productivity, domestically oriented activity and closer to tradable scale.
In Jordan, the macroeconomic environment does not allow private markets to develop a scalable domestic tradable base. Under the exchange rate peg, domestic exporters do not benefit from periodic currency depreciation to offset rising domestic costs, while selling into global markets facing prices set abroad, they cannot raise prices when local costs increase, or else they’ll be driven out of the market. When costs rise, margins are squeezed directly. Because the exchange rate does not adjust, firms cannot rely on currency movements to restore competitiveness. Instead, they must lower unit costs by producing more per worker to dilute their fixed costs and increase economies of scale. Productivity, therefore, becomes the only channel through which tradable manufacturers can remain competitive. But productivity gains in manufacturing are not automatic. They come from sustained investment in machinery, technology, skills, logistics, and scale, often over long periods and with uncertain payoffs. The peg, therefore, raises the bar for entry and survival in tradables by making productivity improvements essential while offering no short-term relief through price or exchange rate adjustment.
That requirement collides with the structure of domestic finance. As discussed in the earlier analysis of fiscal and monetary interaction, the financial system is organised around preserving liquidity and confidence in the peg.
This dynamic can be understood by examining the transmission mechanism sequentially and systematically. When domestic demand rises, whether through higher household spending, private investment, or government activity, a large share of that demand leaks into imports. This is not because Jordanians have unusual preferences. It is because the production structure is import-intensive. Energy is imported. Many capital goods are imported. Many intermediate inputs used by domestic firms to create final goods are imported. Many consumer durables are imported. So a demand expansion quickly becomes a rise in imports, which is a rise in demand for dollars domestically.
If exports and other foreign currency inflows rose automatically in parallel, this leakage would be manageable. When foreign exchange earnings do not keep up, the external gap widens. Under a flexible exchange rate, the currency can adjust: depreciation makes imports more expensive and exports more competitive, and over time, the economy rebalances through prices. Jordan does not use that adjustment channel. Under the peg, the nominal exchange rate is fixed, and confidence in the peg is the anchor of the entire macro/monetary regime. So when the external balance deteriorates, adjustment cannot come from the currency. It must come from quantities: slower domestic spending, tighter credit, higher interest rates, fiscal restraint, or all of the above. In other words, the peg converts an external imbalance into an internal tightening.
This is the same logic behind the unemployment equilibrium discussed previously Why Jordan’s unemployment is not a failure but a feature. The chain is mechanical. Higher demand raises imports. Higher imports raise the need for foreign currency. If that need threatens reserves or confidence in the peg, domestic conditions must tightehttp://Why Jordan’s unemployment is not a failure but a featuren through the Central Bank raising interest rates to slow aggregate demand, and increase demand for the JOD, which will be achieved through increased capital inflows. That tightening reduces sales growth and raises financing costs. Lower expected sales and higher financing costs reduce private investment, and thus any expansion is halted. Lower investment reduces hiring. Employment becomes one of the margins through which the system protects internal monetary stability.
Now connect this to industrialisation. Manufacturing-led export growth is not like opening another domestic shop. It is a high threshold activity. It requires scale because global markets are competitive and margins are thin. It requires patience because the first years often involve heavy upfront spending on machinery, training, compliance, and market access before the firm becomes efficient enough to win repeat contracts. It requires cheap and reliable long-term finance because factories and supply chains are long-lived assets, not short-cycle projects. It requires working capital that can tolerate volatility because export orders are lumpy, payments are delayed, and external demand fluctuates. It requires a cost structure that can withstand international price discipline.
Jordan’s macro regime raises that threshold in two ways, one through competitiveness and one through finance.
Under a fixed exchange rate linked to a strong global currency, domestic costs are effectively translated into a high foreign currency value. The key issue is not that wages are rapidly rising; the opposite is likely true. The deeper issue is that productivity growth is not fast enough to make unit costs fall once we account for the JOD’s real exchange rate. The real exchange rate is, in plain language, the cost of producing in Jordan compared to producing elsewhere, once you account for prices and the nominal exchange rate. When the exchange rate is rigid and productivity is slow-moving, competitiveness does not adjust smoothly; rather, it deteriorates when compared to other industrialised countries. Firms cannot rely on a currency move to restore margins. They have to earn competitiveness through higher output per worker, also known as higher productivity, better logistics, lower energy costs, lower transport costs, regulatory efficiency, and scale. Those are the right long-run ingredients, but they take time and investment. In the meantime, the fixed exchange rate acts like a filter: only firms that can clear a high productivity bar can compete sustainably in goods exports.
In the fiscal monetary piece, I argued that the structure of Jordan’s financing is shaped by the needs of the state and the requirements of the peg. The government has large and persistent financing needs due to social contracts in employment and external risks passing through into the domestic economy. Domestic banks hold a significant share of government debt because it is liquid, low risk, and offers predictable returns. The Central Bank manages liquidity in a way that preserves confidence in the currency regime. This configuration is rational for stability, but it has its trade-offs. When banks can earn attractive returns by holding government paper, and when liquidity conditions tighten whenever external pressure rises, private credit does not flow neutrally across the economy. It tilts toward activities that fit the banking system’s comfort zone: short maturities, clear collateral, predictable cash flows, and domestic currency revenues.
Once credit is filtered through these criteria, the sectoral pattern follows. Lending naturally favours non-tradables. Real estate offers collateral, and most importantly, competition is muted and isolated from the global markets, which allows domestic firms with any market power to establish predictable cash flows. These activities sit comfortably within a system that prioritises liquidity and repayment certainty. Export-oriented manufacturing does not. It requires longer maturities, tolerance for volatile revenues, and financing structures that rely on patient capital. That patience, however, exposes lenders directly to interest rate risk. Under a fixed exchange rate, domestic policy rates must adjust in response to external pressures rather than domestic investment cycles, which means that long-dated industrial loans are vulnerable to abrupt tightening driven by balance of payments considerations rather than firm-level fundamentals. Faced with this information asymmetry, financial institutions rationally prefer activities whose cash flows can absorb or be repriced quickly when monetary conditions change. Credit is channelled toward uses that minimise exposure to policy-induced interest rate volatility and maximise repayment certainty. Endogenous productivity growth is thus constrained not by a lack of entrepreneurial effort, but by a financial structure that is rational for stability yet ill-suited to financing the investment process through which tradable firms become competitive.
Stability has been prioritised rationally. Though that stability raises the productivity threshold required to compete in goods exports, it also raises the financing threshold required to scale capital-intensive activity. When both thresholds are high at the same time, large-scale industrialisation is not just difficult but structurally misaligned with the incentives created by the macro system. The economy then does what economies always do under constraints: it reallocates toward the activities that survive and earn acceptable returns within the regime. The banking sector’s preference towards services and non-tradables thus becomes the equilibrium outcome.
This is not an argument that Jordan should celebrate low-productivity domestic activity or pretend that any service job is development. Services are not a single category. Many local services are non-tradable and low-productivity by nature; they recycle domestic purchasing power rather than generating new foreign exchange. However, another class of services is of enormous importance in Jordan’s context: exportable services and foreign exchange-earning services. Tourism is the obvious one. Professional services, technology, design, remote business support, education services serving non-residents, and other activities where Jordan sells skill and credibility into external markets can earn foreign currency without requiring the same scale of physical capital as manufacturing. These activities can fit a stability-focused regime better because they rely less on imported machinery, can scale through human capital and networks, and often carry higher value added per worker. They also benefit from what the regime does best: preserving monetary credibility and maintaining financial stability.
Industrialisation is not the only serious development path. In many countries, it was the path because the macro regime, labour costs, and financing structure made it the least bad route to mass employment. Jordan’s regime produces a different growth signature. It is better suited to activities that can earn foreign exchange without constantly forcing the country into an import surge that then triggers tightening. It is better suited to activities that can operate with a strong currency because their productivity is high enough or because their product is differentiated enough. And it is better suited to activities that do not require years of cheap patient capital from a banking system whose balance sheet is structurally pulled toward sovereign financing and short-cycle lending.
Seen this way, the three issues discussed across these articles are not separate problems. They are one system showing up in three places. Fiscal pressure and domestic debt absorption crowd out risk-bearing private credit and tilt finance toward safe uses. The peg and the external account convert demand expansions into tightening cycles that depress investment and hiring. And those same features raise the hurdle rate for goods exporting firms that need scale, time, and patient finance. When tradables cannot scale, the economy cannot grow through external demand. When the economy cannot grow through external demand, domestic demand cannot be allowed to run freely because it leaks into imports. When domestic demand cannot run freely, firms do not see stable, expanding markets, and they do not invest. When firms do not invest, unemployment persists.
None of this should be read as an attack on stability. On the contrary, Jordan’s macro regime reflects a rational choice under difficult geopolitical and external financing realities. The Central Bank’s credibility, the disciplined defence of the peg, and the preservation of a resilient banking system are genuine public goods. They protect living standards from the inflationary chaos that destroys countries. They keep the state functioning. They reduce the probability of an abrupt crisis. That achievement is often underappreciated because it is invisible when it works.
But every regime has trade-offs, and every regime has a growth signature. Jordan’s current framework produces stability with constrained industrial tradables, and that constraint shows up as limited growth capacity and persistent unemployment. The uncomfortable implication is not that the peg is a mistake or that stability was the wrong priority. The implication is that the solution to Jordan’s high unemployment, high public debt or any other macroeconomic issue likely does not lie in mass industrialisation.
Ibrahim Rihani studied economics with a focus on monetary and fiscal policy in Jordan and works at the IFC as a part of their investment analyst program. His interests lie in macro-financial policy trade-offs and their implications for growth, debt, and stability.
