It was distressing to read that the previous Council of Ministers had attempted to remove the customs exemption on hybrid cars that it had instituted earlier on and that the decision was not repealed until an ambassador of a donor country interfered to withdraw the decision.
Even though what would have been a blunder was avoided, damage still occurred. Reviewing what purportedly happened is a study in economic policy ineffectiveness.
Jordan adopted a policy of removing customs and tax duties on hybrid cars as of the middle of 2008, to encourage a cleaner environment through reduced emissions. Since customs duties and taxes on vehicles amount to almost 100 per cent of the value of a car, citizens were thus encouraged to purchase such cars and save on the energy bill and the environment.
In the first 11 months of 2009, almost 4,000 cars entered the Kingdom. Within the first three weeks of December last year, given the rumours that the government may retract the exemption incentives, almost 900 new hybrids were imported in a rush to avoid a sudden policy retraction. The panic continued amidst fears of policy reversal. The total number of imported hybrid cars thus far is over 6,200.
The incentive, which was consistent with best practices in environmental protection, was laudable at the time as a wise, environmentally friendly decision. In fact, social media groups such as Urdunmubdi3.ning.com even started a campaign to increase awareness of the benefits of hybrid cars.
Average monthly fuel savings amount to JD40 per car, a national saving of JD3 million, which would have been spent on useless energy.
Given an average lifetime of 10 years per car in Jordan, this translates into JD30 million (this is without doing a sophisticated economic analysis) for these cars alone. If the practice spreads, the potential annual savings are immense, especially if fuel prices return to their previously high figures, which is a possibility.
Savings on fuel consumption can be redirected at better consumption patterns or higher saving rates (Jordan is among the lowest in the region in savings), which is the basis for domestic investment and economic growth. Wasting energy is viewed as a “dead-weight loss” in economics, a measure of lost efficiency in production or consumption.
Beyond the immediate impact on the environment in terms of newer cars, and lower gas emissions - since these vehicles consume less gasoline they pollute less - there is less pressure on the Jordanian dinar exchange rate as we import less oil, which means we would need fewer reserves in the Central Bank and greater savings for Jordan; a shrinking trade deficit, since we import 90 per cent of our energy needs; less outlay on road maintenance, since cars are renewed more often; decreased demand on public transport networks, which are not suitable anyway and require great capital expenditure; greater mobility of labour from the regions of the poverty stricken regions of the Kingdom to work locations; lower inflation rates; and higher employment as companies divert resources to other types of capital expenditures that produce jobs.
Another indirect adverse effect is the impact on domestic and foreign direct investment, which shies away from countries where policy decisions are changed unilaterally and where the legislative environment witnesses sudden policy shifts.
Clearly, the benefits far outweigh the cost to the government from the loss of revenues from customs, which must have been behind the decision to remove the tax incentive.
Why was the decision contemplated? Budgetary shortfalls must be the answer.
The taxman dictated the policy, which underscores a policy-making deficit in the country that is underpinned by two principles: lack of participation by the public in policymaking and the dominance of operational over strategic management of the economy. Both are dangerous and cause the country to trade the welfare and development of future generations for current manageability of the economy.
Jordan has a new Council of Ministers, which I believe is enlightened and has a directive to improve the economy not only this year but for the years to come. It should never produce a policy without a cost-benefit analysis. This is the least that Jordanians deserve.
JordanTimes, 2 February 2010