The impact of favouritism on the business climate: a study on Wasta in Jordan

Abstract

"Wide-ranging agreement exists today that a good business climate is central to economic growth and poverty alleviation. But questions remain open about the role of the state in creating a good business climate. This study is intended to answer some of these questions. The Arab Human Development Report 2004 stresses that sustainable economic growth cannot be achieved in the MENA countries without improved governance. One of the core dimensions of good governance is transparency and the control of corruption. The latter in particular is important for a good business climate (World Bank 2005f). Corruption can take different forms, one of them being favouritism which is very widespread in the MENA region. It is usually referred to there as 'wasta', which is Arabic for 'relation' or 'connection', and describes the use of personal relations for preferential treatment. The present study focuses on the economic effects of wasta. It has a twofold aim: first to find out how the use of wasta in state-business relations affects the business climate and investment and, thereby, economic development at large, and, second, to identify starting points for curtailing the use of wasta. All reference is hereby to Jordan, which has been selected for this case study for pragmatic reasons. Chapter 2 presents the conceptual framework of the study: It defines first the key terms and concepts of the study: business climate, state-business relations, favouritism, and wasta. After that, it discusses in general terms why and how favouritism may affect the business climate. Finally, the chapter draws upon theoretical literature to give possible explanations for the prevalence of favouritism in a given country. Chapter 3 is based on the results of Chapter 2 and delineates the hypotheses tested by our empirical research in Jordan. In addition, it gives a detailed account of our research methodology. Chapter 4 outlines the main features of the business climate in Jordan: It identifies the main problems perceived by businesspeople and discusses possible reasons for these weaknesses. The chapter concludes that statebusiness relations are a major area of concern for investors in Jordan. Chapter 5 turns to the role of wasta in Jordan. It shows how the use of wasta permeates all areas of economic and social life and gives an insight into the ambiguous attitudes of Jordanians toward wasta. Chapter 6 is devoted to the effects of wasta on the business climate and on investment. It shows that the prevalence of wasta in Jordan makes statebusiness relations unfair and inefficient. In addition, wasta establishes incentives for investment in social relations rather than in productive capital,thus lowering the rate of capital formation in Jordan. Chapter 7 concludes with policy recommendations." (excerpt)