By : Ibrahim Rihani
Jordan Daily – Jordan’s economic problem is sometimes framed as a shortage of capital, with the implied remedy being more aid, more foreign direct investment, and more concessional finance. This framing fails to explain a basic empirical reality. Jordan already receives large and persistent external inflows, yet growth remains modest, the tradables base is thin, and unemployment structurally high. The binding constraint is not capital scarcity but capital misallocation under a macro regime that systematically rewards non-tradables.
Foreign inflows stabilise the economy, but they do not operate as an engine of growth. They enter the system, support consumption, balance sheets, fiscal rollover and reserve buffers, and are absorbed without altering the productive structure. This mechanism links the arguments developed in the earlier articles. The fiscal–monetary trap under the peg persists not because resources are unavailable, but because external finance is systematically channelled into uses that defend stability rather than expand productive capacity. Unemployment remains an equilibrium outcome because tradables never scale enough to absorb labour, and the external constraint remains binding because inflows finance imports faster than they finance exports.
External inflows arrive through multiple channels: aid, remittances, concessional lending, and FDI. They do not all behave the same. Remittances and transfers are used by households to smooth consumption over time; they stabilise consumption baskets, housing, education, and basic welfare. Aid and concessional finance act as state insurance; they stabilise budgets, extend fiscal space, and support reserves to avoid abrupt contraction or balance-of-payments stress under a hard peg. FDI is inherently return-seeking capital and, in principle, should be the channel that builds capacity. Yet under Jordan’s current incentives, even FDI is pulled into demand-monetising, domestically-priced sectors because those are where the risk-adjusted returns are most bankable. The channels differ, but the macro destination converges in effect: the system repeatedly protects the present stability or monetises domestic demand, without building the future export capacity required to change the growth path.
Under a fixed exchange rate, demand created by inflows quickly leaks into imports unless domestic producers can expand output rapidly. In Jordan, they cannot. Energy is expensive, logistics are costly, scaling is difficult, and exporting is structurally hard. Building competitive tradables requires time, coordination, and a large upfront investment. Capital, therefore, flows toward activities with faster payoffs and lower uncertainty, notably non-tradable services, real estate, and government-linked sectors, rather than exports. Foreign capital is thus not scarce; it is allocated away from growth-generating uses.
FDI reflects this structure. Jordan does receive foreign investment, but it is concentrated in sectors that neither relax the external constraint nor raise productivity at scale. Real estate, non-tradable services, utilities and regulated infrastructure concessions dominate lending. These investments are profitable and consistent with the peg, but they generate limited export growth and weak labour absorption. FDI therefore reinforces the existing economic structure instead of transforming it. Thus, the problem lies not in confidence or stability but in the macro environment and domestic incentive structure that make non-tradables the dominant investment choice.
The data is consistent with this interpretation. According to World Bank data, Jordan’s FDI inflows average around 3 per cent of GDP, materially below the levels seen in comparable middle-income economies that have translated foreign investment into export expansion, where inflows in many periods have been closer to 6 to 8 per cent of GDP. This gap is not explained by openness or headline stability, where Jordan often performs credibly, but by the absence of conditions that make tradables investment scalable and competitive. At current magnitudes, foreign capital can be absorbed profitably through non-tradables, regulated services, banking, utilities, and consumption-facing sectors, supported by population growth, remittances, aid, and macro stability. These investments monetise domestic demand, face limited productivity competition, and benefit from a peg that lowers financing costs while preserving purchasing power, giving FDI a profitable and reliable source of return.
The real constraint appears when you ask the economy to absorb materially larger inflows on a sustained basis. Scaling FDI to “exporter” magnitudes only works if capital can be absorbed into export-oriented manufacturing or complex tradable services, because domestic demand in a small economy such as Jordan does not offer enough depth for large-scale, repeatable FDI opportunities. Jordan struggles to do this because it has not solved the industrialisation problem. When inflows cannot find tradables outlets, they crowd into saturated domestic sectors or attempt to compete in export markets without a cost-and-scale foundation. Investors stop not because Jordan is uniquely risky or closed, but because the economy cannot reliably convert additional capital into foreign-exchange-earning capacity, available only in global markets.
The marginal dinar of investment, therefore, expands sectors that can grow without proportional labour hiring, either because they scale through balance sheets and asset prices rather than headcount, or because regulation and non-tradable rents substitute for innovation and productivity. A further reinforcing channel is the sectoral destination of FDI itself. In Jordan, a substantial share of cumulative FDI, on the order of roughly one third, has flowed into real estate and property-related activities, according to CBJ and investment data. This matters because real estate investment expands the stock of bankable collateral, which mechanically tilts domestic bank lending further toward property-backed, non-tradable activities. As this cycle repeats and the real estate sector continues to expand, foreign investors observe rising asset values, easier leverage, and predictable exit opportunities, reinforcing the perception that real estate is the most profitable and least risky destination for new FDI. As collateral values rise, funding costs for non-tradables fall, while tradables, whose assets are largely movable, intangible, or face global competition (with no ability for increased competitiveness through FX depreciation), face persistently higher financing costs. The result is a crowding-out effect: credit capacity is absorbed by collateral-rich sectors, leaving export-oriented firms underfinanced even when their productivity and social returns are higher. This creates a self-reinforcing spiral in which FDI into real estate strengthens the financial dominance of non-tradables, deepens banks’ preference for property-backed lending, and further constrains the financing of tradable production, locking capital allocation onto a low-growth path.
Tradables, the only segment capable of absorbing labour at volume while simultaneously raising productivity and foreign exchange earnings, remain undercapitalised because exporting is structurally costly and the payoff horizon is long. External inflows thus stabilise aggregate demand, but the composition of that demand does not translate into labour demand.
This logic helps explain why unemployment in Jordan remains structurally high. When foreign capital enters the economy, it flows into sectors that create few jobs. The issue is not services in general, but the specific types of services and property activities that are attractive under the peg. These sectors earn returns from assets, licences, and regulated pricing rather than from expanding output, so they hire few workers and generate weak spillovers. At the same time, export-oriented industries that could employ large numbers of workers and raise productivity struggle to attract capital because they face higher costs, limited scale, and difficult access to external markets. As a result, foreign inflows stabilise demand and preserve macroeconomic balance, but they do not translate into job creation. Unemployment becomes the pressure valve that allows the system to remain stable without structural change.
Contestability and competition play a central role in reinforcing the structural bias toward non-tradable sectors. Where market entry is constrained by licensing regimes, zoning restrictions, regulatory discretion, or access to state-linked concessions, competitive pressures are weak, and returns persist above competitive levels. That changes the nature of FDI. Capital does not enter to raise productivity or force domestic firms to upgrade, but to acquire a position inside a profit-bearing market. Non-tradable activities in Jordan are unusually contestable on paper but weakly contestable in practice, which means incumbents face little pressure to innovate, lower prices, or expand employment. This matters because productivity spillovers from FDI are not automatic; they require competitive stress. When markets are insulated, foreign investors rationally behave like domestic ones: they optimise around regulatory access and demand capture rather than scale, exports, or technology diffusion. Tradables face the opposite environment. They are exposed to global competition, thin margins, and relentless price pressure, while receiving none of the domestic protections that make rents durable. In a global tradeable market, FDI is forced to find windows of innovation within the domestic market to capture global profits. FDI flows toward sectors where returns are defended by market structure rather than earned through productivity, reinforcing capital deepening in non-tradables and starving export sectors of the competitive ecosystem they need to scale.
This is not an argument against foreign capital itself. Without external inflows, Jordan would face recurrent balance-of-payments crises with far harsher social and political consequences. External finance thus buys breathing space by stabilising demand, smoothing adjustment, and preserving macro credibility. The problem is what that breathing space is used for. Instead of being leveraged to reallocate capital toward activities that raise productivity and export capacity, it is rationally absorbed to defend the existing structure. If investment and demand were to expand first, imports follow immediately, exports follow slowly if at all, the current account deteriorates (as more JODs are being sold in return for USDs to import more, while demand for the JODs remains constant, placing downward pressure on the JOD), and policy is forced to tighten before any structural transformation can take hold. The economy never gets a long enough runway for the only mechanism that actually grows a tradables base.
Jordan’s Economic Modernization Vision (EMV) can avoid this by directing policy and investment toward sectors with demonstrable tradable potential and latent comparative advantage, then linking that targeting to a sequence of productivity-enhancing actions. The first step is identifying tradable sectors where Jordan has either existing competitiveness or credible potential, such as pharmaceuticals, mining inputs, ICT services and logistics. The second step is raising productivity in those sectors through workforce skills development tailored to export tasks, technology adoption and quality upgrades that match international standards, regulatory reforms that reduce administrative and trade costs, and infrastructure improvements that lower logistics and input costs. These interventions increase output per worker and compress unit production costs, which is the necessary condition for tradables to be competitive in foreign markets. With lower unit costs and improved access to markets, firms are able to expand exports, earn foreign exchange and achieve scale, which then feeds back into higher investment and deeper participation in global value chains.
If implemented credibly and sustained over time, EMV has the potential to reorient investment toward tradable sectors where Jordan can develop or deepen its comparative advantage. Its architecture is explicitly designed to shift resources away from non-tradable domestic services and toward activities capable of earning foreign exchange and competing internationally, by aligning the eight growth drivers with a defined set of tradable opportunities. In practice, this means prioritising tradable sub-sectors under drivers such as “High-Value Industries” and “Future Services”, with initiatives that focus on export promotion, value-chain integration, productivity upgrading, and investment facilitation across manufacturing, agri-processing, pharmaceuticals, chemicals, textiles, logistics, ICT, and tradable financial and transport services.
This approach can bypass some of the traditional constraints Jordan has historically faced when attempting to industrialise, but only if it forces the right microeconomics inside the macro constraint. Jordan’s pharmaceutical exports reached around JD 611 million in 2024, with about 80 per cent of production sold abroad to some 85 markets, demonstrating global competitiveness. Mining products are structurally central to Jordan’s exports: phosphates and potash alone account for roughly 15 to 20 per cent of total merchandise exports in recent years, making fertilisers and related mining outputs one of the country’s largest and most persistent foreign exchange earners. EMV then has to act on this with a real transmission channel: identify sectors with tradable potential; implement targeted interventions that raise firm-level productivity and compress unit costs; reduce trade frictions and logistics costs; and tie support to export performance and scale.
In conclusion, Jordan’s constraint is not the availability of capital but the absence of mechanisms that systematically channel it into activities that expand export capacity faster than import demand. Unless this allocation problem is addressed, FDI will continue to support stability without driving structural change, and growth will remain bounded by the same external constraints that have shaped the economy for decades.
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.
