How Mass Immigration Affects Countries with Weak Economic Institutions: A Natural Experiment in Jordan

By Alex Nowrasteh, Andrew C Forrester, Cole Blondin

The World Bank Economic Review, lhy032, https://doi.org/10.1093/wber/lhy032

Abstract

1. Introduction

The economic benefits of immigration are large. Persistent global wage differences for observably identical workers indicate that economic efficiency losses from immigration barriers are large and one or two orders of magnitude larger than the losses resulting from barriers on trade and capital flows (Clemens 2011).

However, immigrants could alter destination countries’ economic institutions that are vital causes of economic development and the source of the vast observed differences in worker productivity between nations (Acemoglu and Robinson 2012; Dell 2010; Rodrik, Subramanian, and Trebbi 2004). The economist George Borjas argued that the “the entry/exit of perhaps hundreds of millions of people” would likely have a negative impact on the institutions of developed countries perhaps even to the point of wiping out all of the expected efficiency gains from immigration (Borjas 2015). Thus, the efficiency gains from liberalized immigration to the developed world hold only if the immigrants do not import negative social capital to the extent that it overwhelms and degrades the destination country’s institutions (Clemens and Pritchett 2019).

Much research has subsequently examined how immigration affects economic institutions in destination countries. Clark et al. (2015) find a positive and statistically significant relationship between both initial stocks and flows of immigrants with improvement in the economic freedom score from 1990 to 2011. Clemens and Pritchett built a novel epidemiological model that assumes immigrants bring stagnation factors with them, finding no real-world impact (Clemens and Pritchett 2019). Powell, Clark, and Nowrasteh (2017) examine a natural experiment whereby Israel absorbed a massive exogenous shock of Jewish refugees from the Soviet Union that substantially improved its economic institutions.

The existing research is primarily focused on the impact of immigrants on the economic institutions of developed nations. This paper expands the literature by examining immigration’s impact on a country with much weaker economic institutions: Jordan.

In 1990 and 1991, about 300,000 Palestinians were expelled from Kuwait by Saddam Hussein’s invasion and could not return after the war (van Hear 1992; Colton 2002). These Kuwaiti-Palestinian refugees were forced to take refuge in Jordan where, due to a quirk of Jordanian law, they arrived as citizens who could vote, work, own property, and otherwise influence the political and economic systems of Jordan even though most of them had never lived in Jordan before. The surge of 300,000 Kuwaiti-Palestinians was equal to about 10 percent of Jordan’s pre-surge population. To make it more challenging, the Kuwaiti-Palestinians arrived during a severe recession in a country with weak economic institutions.

Natural experiments like these are valuable because they remove concerns about endogeneity. Economists have successfully used natural experiments to study how exogenous immigration shocks affect labor markets (Borjas 2015). This paper uses the Synthetic Control Method (SCM) to measure how the immigrants affected Jordan’s economic institutions (Abadie and Gardeazabal 2003; Abadie, Diamond, and Hainmueller 2010,, 2015; Peri and Yasenov 2017). SCM makes it possible to weight pre-surge economic institutional quality scores in various countries to create a counterfactual Synthetic Jordan. The Synthetic Jordan’s economic institutional quality score is charted after 1990 as if no refugee surge had occurred and provides a comparison to Real Jordan. The refugee surge can thus plausibly explain the difference between Real Jordan and Synthetic Jordan after the intervention date.

The next section provides a brief history of institutions in Jordan and the 1990–1991 exogenous surge of Kuwaiti-Palestinian refugees. Section 3 focuses on the upsides and downsides of using Jordan as a natural experiment. Section 4 describes the data used. Section 5 explains the methodology. Section 6 includes the results and robustness tests. Section 7 discusses how the SCM results are consistent with Jordan’s history of institutional change. Section 8 concludes.

2. Jordan’s Institutional History and the Refugee Surge

Jordan is a small Middle Eastern country that became fully independent in 1946. It is bordered by Iraq, Israel, Saudi Arabia, Syria, and the West Bank. The original inhabitants of Jordan are called Transjordanians.

The Jordanian Government and Economic Institutions Prior to the Refugee Surge

The Jordanian government is an authoritarian monarchy advised by a strong cabinet with a parliament that swings between extremes of total acquiescence to the monarchy and partial openness (Richards 1993). In practice, the Jordanian monarch shares power with parliament, a cabinet, and the Legislative Council that includes religious and ethnic minorities in a wide governing coalition (Alon 2007; Piro 1998). Over Jordan’s history, Jordanian kings incorporated growing minority and interest groups into the government coalition (Lucas 2003; Richards 1993). For instance, Palestinians who arrived as refugees in 1949 earned citizenship, but the government denied them access to many state benefits, employment in state-owned enterprises (SOE), and employment by the state itself (Brynen 1992).

Economically, Jordan adopted an import substitution industrialization (ISI) development policy after 1950 whereby Transjordanians were offered employment in large SOEs, employment in Jordanian state agencies and the military, and government subsidies for consumer goods (Piro 1998). Palestinians paid high taxes, were heavily regulated, and could not access credit due to government financial favoritism for large SOEs. Few Palestinians were part of the governing coalition in the 1980s and never in proportion to their numbers (Sütalan 2006). The distinction between the governing Transjordanians who received government benefits and the Palestinians who worked in the private economy produced a politically tense situation by 1990.

Foreign loans, foreign aid, monopoly rents, high taxes on the small Palestinian-dominated private sector, and worker remittances propped up the underperforming Jordanian economy until the late 1980s (Knowles 2005; De Bel-Air 2007; Gelos 1995; Brynen 1992; Piro 1998). In 1989, chronic inflation produced a 60 percent devaluation of the Jordanian currency and the government was perilously close to defaulting on several international loans (Kanaan and Kardoosh 2003; El-Sakka 2007; Amerah 1993). Jordan called in the International Monetary Fund (IMF) and the World Bank for assistance. The first IMF agreement sought to reduce Jordan’s budget deficit, reform taxes, reduce inflation, institute more prudent debt management, and reduce protectionism to stimulate export-based development in exchange for debt rescheduling (Richards 1993; U.S. Department of State 1995). The government held elections in 1989 during an economic crisis, the Palestinian Intifada in neighboring Israel, and domestic unrest in opposition to loan conditions from the International Monetary Fund and World Bank (Lucas 2003).

Shortly thereafter, the First Gulf War deepened the recession, so the IMF delayed the signature of the first agreement due to the political strain it placed on Jordan’s government (Swaidan and Nica 2002; Piro 1998). In 1991, a second IMF agreement placed a temporary moratorium on debt payments in exchange for additional economic reforms (Richards 1993). The Jordanian government published a National Charter in July 1991 to gradually introduce democratic reforms, include Palestinians in the governing coalition, support free market economic reforms, and protect private property (Knowles 2005; Maktabo 1998; Richards 1993; Brynen 1992; Sütalan 2006; Robinson 1998). The World Bank also suspended repayments until 1992 (World Bank 1995).

From 1975 to 1990, Jordan fell from the 48th freest economy in the world to the 58th according to the economic freedom of the world (EFW) score (Gwartney, Lawson, and Hall 2017). During the same period Jordan’s EFW score rose from a low of 4.83 in 1975 to 5.43 in 1990. The shrinking economy, regional political instability, war, and a precarious situation with foreign lenders made 1990-1991 a difficult time to absorb a massive surge of refugees or reform economic institutions (Gelos 1995; Troquer and al Oudat 1999; Mruwat, Adwan, and Cunningham 2001; Manuel 1991).

Refugees in Jordan

Jordan has absorbed many waves of refugees, especially Palestinians who arrived after the Arab-Israeli War ended in 1949 and after the Six Day War in 1967. The United Nations Relief and Works Agency for Palestinians counts the Palestinian refugees and their descendants born afterward as refugees so it is difficult to estimate the total number of Palestinians who entered Jordan in surges after 1949. According to one estimate, there were a total of 100,000 Palestinian refugees on the East Bank of the Jordan River in 1949, roughly equal to a quarter of Jordan’s population at the time (Piro 1998). Jordan also temporarily extended its sovereignty over the West Bank, which brought Jordan’s total Palestinian population to over 500,000 (Migration Policy Center 2013).

Jordan integrated the Palestinians by granting citizenship to those in its territory in 1954 and to all Palestinians living in the West Bank and their descendants—an action with important ramifications when the Kuwaiti-Palestinians began to arrive in 1990 (Maktabo 1998). In 1988, Jordan relinquished territorial claims on the West Bank and adjusted citizenship laws to exclude Palestinians from the West Bank who had two-year Jordanian passports from Jordanian citizenship, thus limiting citizenship to Palestinians living in Jordan and Palestinians with five-year Jordanian passports (British Refugee Council 1994). Palestinians who lived in Kuwait held the five-year Jordanian passport.

Saddam Hussein’s unexpected invasion of Kuwait on August 2, 1990 created two waves of refugees to Jordan. The first lasted from August 3 to November of that year, during which nearly 1.2 million refugees from Iraq, Kuwait, and other states travelled to Jordan (van Hear 1992; Mruwat, Adwan, and Cunningham 2001; UNDRO 1990). About 800,000 refugees were repatriated within two weeks of arrival, but about 230,000 were Kuwaiti-Palestinians with five-year Jordanian passports (UNDRO 1990; Mruwat, Adwan, and Cunningham 2001). A second wave of about 65,000 Kuwaiti-Palestinians arrived in Jordan from March to August 1991 (van Hear 1992; Troquer and al Oudat 1999). The first wave of Kuwaiti-Palestinians fled Saddam Hussein’s invasion and the second wave was expelled by the Kuwaiti government in what the king of Kuwait called a “cleansing” (van Hear 1992; Haddad 2010; Kuttab 2005; Ibrahim 1991; Rosen 2012).

Many of the Kuwaiti-Palestinian refugees had been working and living in Kuwait for decades and the majority had never lived in Jordan. They moved to Kuwait from the West Bank in two waves from the 1940s to the 1970s, and over 90 percent had been out of the West Bank for more than 10 years, 43 percent for more than 20 years, and nearly a quarter had emigrated prior to 1960 (Troquer and al Oudat 1999). Jordan’s grant of citizenship did not require residence, so the refugees could immediately work, live, vote, lobby the government, and affect Jordan’s economic institutions even though they “were unfamiliar with Jordanian culture and were economically maladapted to a country in which most had never lived” (van Hear 1995; Troquer and al Oudat 1999).

Kuwaiti-Palestinians, faced with circumstances as bad as anything Palestinians had experienced in the past, fled to a new country with unfamiliar culture and institutions. Anti-Palestinian sentiment in Jordan was strong. “They have their own country; let them go and live there” was a common Transjordanian sentiment (Mruwat, Adwan, and Cunningham 2001). Many Palestinians considered their own displacement from Kuwait as equivalent to the personal and socio-economic impacts of the Arab-Israeli War and the Six Day War (van Hear 1992). Yasser Arafat, head of the Palestinian Liberation Organization, said, “What Kuwait did to the Palestinian people is worse than what has been done by Israel to Palestinians in the occupied territories” (Rosen 2012).

3. Jordan as a Natural Experiment

The movement of Kuwaiti-Palestinians into Jordan was an exogenous shock caused by outside actions and not by changes in Jordan’s economy, policy, or institutions, and thus an excellent example of a natural experiment.

First, Saddam Hussein’s invasion of Kuwait was unexpected by Jordan, Kuwait, the Kuwaiti-Palestinians, and the rest of the world. The surge of refugees was so sudden that they began to leave Kuwait for Jordan the day after the invasion of August 2, 1990 (UNDRO 1990). In September 1990, the Jordanian government did not even realize that many of the refugees were Jordanian citizens and didn’t know how many would arrive (UNDRO 1990).

Second, there was no change in Jordanian policy that attracted the Kuwaiti-Palestinians. The 1988 reform to the citizenship laws did not affect the Kuwaiti-Palestinians who already held five-year Jordanian passports. Jordan was poorer than Kuwait, suffering through a serious economic contraction that worsened during the Gulf War, and Kuwaiti-Palestinian salaries in Jordan were approximately 30 percent of the average monthly pay in Kuwait (Colton 2002; Gelos 1995).

Third, the number of Kuwaiti-Palestinian refugees was about 10 percent of Jordan’s pre–Gulf War population. By contrast, the surge of Marielitos to Miami in 1980, a famous natural experiment in the immigration literature, was equal to just 7 percent of Miami’s pre-Mariel population. The Kuwaiti-Palestinians were confined to Jordan unlike the Marielitos, many of whom eventually left Miami (Peri and Yasenov 2017).

Fourth, Kuwaiti economic institutions were of lower quality than Jordan’s in 1990, so the Kuwaiti-Palestinians were not going to bring experience of superior economic institutions with them (Gwartney, Lawson, and Hall 2017). Kuwait had the 71st-freest economy in the world in 1990 compared to Jordan’s rank of 58.

Fifth, the substantial population of Palestinians already living in Jordan strengthens the case that this is an exogenous shock that would quickly impact Jordanian institutions. The Kuwaiti-Palestinian refugees faced lower transaction costs to enter established political and economic networks occupied by their co-ethnics. Instead of spending time learning about local politics, the Kuwaiti-Palestinians had an immediate impact on Jordan’s economic institutions facilitated by networks of their longer-settled co-ethnics (van Hear 1998). This is similar to how the large population of Cubans living in Florida in 1980 helped facilitate the rapid labor market integration of Marielitos. Refugee surges tend to upset ethnic balances and produce governing tensions and sometimes civil war, especially when the refugees possess ethnic ties with large groups in the host country (Buhaug and Gleditsch 2008; Salehyan and Gleditsch 2006). The surge’s upsetting of ethnic balances and the governing coalition explain Jordan’s subsequent economic reforms.

The last and best feature of this sudden natural experiment is that the Kuwaiti-Palestinians had full legal, political, and economic rights immediately upon entering Jordan, a situation unique in the Arab world (Zureik 1994).

Three features of this exogenous shock make it less useful as a natural experiment. The first is that the Kuwaiti-Palestinians were overwhelmingly Sunni Muslims, just like Jordan’s population. The second is that Jordan did not have a democracy like other nations that accepted large numbers of immigrants. Jordanians voted in the 1989 elections and expected future elections, but their impact on policy through voting was limited. Third, Jordan did not have a welfare state as large as those in the developed world (Brynen 1992).

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