Tuesday, December 25, 2007

2008 Gov Budget

I had a chance to watch the minister of finance deliver his budget proposal on the floor of the parliament and was not happy at all.

The new budget aims to help the poor and needy and provide a more equitable distribution of income. Sounds great, however, the government plan is flawed as it hopes to achieve this by linking civil servant's salaries with inflation. IMHO, a sure recipe for double digit inflation rates.

Here is how things would probably play out:

1) Government increases civil servant's salaries and minimum wage in correlation with inflation numbers from the previous year.
2) Private sector increase wages based on the new minimum wage and then some more to attract some of the people who might consider government jobs.
3) Commercial sector increases prices due to both increased labor costs and also to take advantage of the increase in the average Jordanian's income(due to the wage increase.)
4) At the beginning of the following year the inflation numbers on which the new wages are computed are higher because all wages(prices) went up and the cycle starts again at number 1

The other thing that I fear from linking wages to inflation rates is that we might lose our competitiveness, and this is already happening to some degree; a number of factories are being moved from the industrial area in Irbid to Egypt because of the significantly lower wages(more than 65% less in some cases.) We might also end up losing some touristic business as the cost for visiting jordan is a bit on the insane side(especially hotels)

In the long run the government can only slow this by not going ahead with its plans. In the long run we need to have industries that have a significant amount of technical knowledge that would not be available in countries that depend on low wages to increase the competitiveness of their goods like Syria and Egypt.

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