Noel Maurer wants to know why I'm here. And also why no pictures!
The second question first, because it's easy: I don't have a camera.
Why I'm here. I ask myself that every day... No, wait, why I'm in Jordan. Well, that gets a little technical. I don't often write about work here. But what the heck. Let's try an experiment. If y'all find it boring, just don't comment.
It's about Jordan's company law.
Let's say you want to start a new company in Jordan. Jordan has several corporate forms available -- simple partnerships, sole proprieterships, publicly traded companies -- but most likely you'll want to start a Limited Liability Company, or LLC. That gives you the protection and flexibility of the corporate form without the elaborate requirements of a publicly traded corporation.
Sounds good... but right away you're going to hit a speed bump: to start a new LLC in Jordan, you must invest a minimum of 30,000 Jordanian Dinars. That's about $40,000 US dollars. In a country where the per capita income is around $4,000 per year, that's a lot of money.
In technical terms, this is a "Minimum Capital Requirement", or MCR. MCRs are pretty common around the world. Almost every country has MCRs for some companies; for instance, there's often an MCR if you want to be traded on the local stock exchange, or if you want to start an insurance company or a bank.
Very broadly speaking, about a third of the countries in the world have only these MCRs, for certain specialized sorts of business. About another third have modest MCRs, US$1,000 or less. (Note that $1,000 is still a lot of money in some places.) And then about half have serious MCRs, enough to make it impossible for most people to start a company.
Why? Well, historically there were several justifications.
1) MCRs showed that the investors were serious. By restricting access to the corporate form, they encouraged all but the most skilled and dedicated from entering into business.
2) MCRs gave protection to creditors.
3) MCRs discouraged the formation of shell companies and certain sorts of fraud.
4) By limiting the number of companies, MCRs made them easier to monitor. It also made it easier for the government to intervene in a particular sector.
5) MCRs deterred the Wrong Sort of People from starting companies.
Now, if you look over this list, you can probably guess what sorts of countries went for MCRs in a big way. That's right -- former European colonies run by governments that were dirigiste, explicitly socialist, or both. Go back 30 or 40 years, and MCRs were conventional wisdom from Malaysia to Mali.
Another factor was that economics -- talking practical, developmental economics here -- went through a long period of being fascinated with large firms and neglecting small ones (except insofar as small firms could become large ones). This wasn't so much an argument for MCRs as an argument against them that nobody was paying attention to. So they discouraged the formation of small businesses; so what? It's big businesses that matter anyway.
But economic orthodoxy has shifted, and the tide has been running against MCRs for a while now. In the last 10 years countries all over the world have been cutting or eliminating them. And now -- maybe -- it's Jordan's turn.
In theory, Jordan could just cut their MCR with a simple change in the law. In practice, there are complications. For example, the fee schedule for new companies is based on the initial capital investment. Eliminate MCRs, and we'll eliminate several million dollars a year of government income. So, someone must develop a new fee schedule that's revenue neutral.
Another issue: there are a lot of Jordanians out there who'd like to start LLCs. How many? Well, we're not sure... but someone needs to find out. Because once the MCR is changed, there will probably be a surge of people wanting to start new companies. If the surge is too big, it will overwhelm the local company registration office.
Yet another: Jordan has a large population of guest workers, mostly from Egypt. (Since many Jordanians work in the Gulf States, this makes Jordan one of the few countries that is both a destination and a source for guest workers.) Remember reason #5, above? There's a concern that if the MCR is dropped too low, guest workers will start founding companies.
Now, this is unlikely to happen, for various reasons; and if it did happen, it probably would not be a big deal. But -- as in most countries with large guest worker populations -- there's a lurking fear that the guest workers will somehow bootsrap themselves into some status they're not entitled to. I don't speak a dozen words of Arabic, but I've already learned the word for "Egyptian" -- "al Masri". (Because I'll be sitting in a meeting, and suddenly the conversation will shift to Arabic and get very animated, and it'll be blah blah blah al-Masri blah.)
Even if the fear is irrational, it's still real, and has to be dealt with. The people who are worried about al-Masri either have to be talked around, or the new law has to contain some provisions that will make it impossible (or at least very hard) for the tricky al-Masri to start a company.
There's more, but that's probably as much as it's appropriate to discuss here.
Anyway, that's what I'm doing in Jordan: I'm working with the Jordanians to help them figure out (1) how low they should drop their MCR, and (2) how to do that.
So. Questions, thoughts?
Questions? Ok.
"Since many Jordanians work in the Gulf States, this makes Jordan one of the few countries that is both a destination and a source for guest workers."
Why does this situation obtain? A premium for Arabic-speakers in menial or semi-skilled positions in the richer Gulf states? Or are the Jordanian expats high-skilled?
Let me take a stab at the method. I'd think the revenue neutrality part would be easy if you can get a decent read on the demand for charters. Estimate a regression equation for the demand for corporate charters per person in flat-fee states, based on (I'm guessing) the size of the fee as a ratio of PPP-adjusted income and some summary measure of red-tape and/or corporate taxes other than the charter fee. Set that puppy times the fee equal to current revenue (or better, if you really need to sell this thing) and solve for the optimal fee.
Alternative: Just drop the fee to something nominal and go with a franchise tax based on assets or issued shares, ala Delaware.
Posted by: Bernard Guerrero | May 31, 2007 at 11:47 AM
I'm curious about five things.
(1) How do you develop a revenue-neutral change in the fee schedule?
(2) How are you trying to discover the latent demand for LLCs?
(3) If the answer to (2) is "lots," how is the Jordanian government planning to pay for the additional bureaucracy?
(4) Is the problem with the al-Masri that the Jordanians fear that the Egyptians will use what Mexicans so creatively call "prestanombres" --- nationals who lend their name to foreign enterprise in order to legalize it? Or is there some other reason why the obvious solution to this problem isn't on the table?
(5) Why didn't you take a camera?
Posted by: Noel Maurer | May 31, 2007 at 12:44 PM
Fascinating... to best reason for reading random blogs around t'internet is to be presented with info you didnt know you were interested in!
I echo the above comment though: Why is Jordan in an exclusive club of importers and exporters of labour? Are not places such as the UK and US similar, in that they send out skilled engineers (etc.) and import low-skilled workers to do the stuff no one local wants to do?
Posted by: Iain Scott | May 31, 2007 at 01:00 PM
Correction. "Set that puppy times the fee equal to current revenue (or better, if you really need to sell this thing) and solve for the optimal fee" should have a "times Jordan's population" in there.
The whole thing should boil down to Charters/person(a function of fee and red-tape) * Population * Fee = Current Revenue (or CR + whatever you need to get people to sign off on this)
Posted by: Bernard Guerrero | May 31, 2007 at 02:33 PM
>Alternative: Just drop the fee to something nominal and go with a franchise tax based on assets or issued shares, ala Delaware.
Bernard- I know you know this, but basically every state in the U.S. does this-- Delaware still leads this race for other reasons.
Posted by: Dennis Brennan | May 31, 2007 at 04:32 PM
Dennis,
It appears to me that the rates and types of business to which franchise taxes are applied (sometimes only financial institutions, f'rex) vary a great deal from state to state, so I don't know if it's fair to state that they all do "it".
That said, I agree that you can't claim Delaware's structure is particularly advantageous compared to other states. I believe a number of other states have lower rates, for instance, and that Delaware is not alone in having multiple methods of calculation. I'm merely tossing DE out there as a successful and well-known example of the concept. It seems like an easy way out of the minimum capital requirement problem.
Posted by: Bernard Guerrero | May 31, 2007 at 06:27 PM
Reporting issues. If you were an investor, how much about your assets would you be willing to tell the Jordanian state? And if you were the Jordanian state, how would you confirm this, while maintaining a friendly business climate and not having the administrative costs go berserk?
Posted by: Carlos | June 01, 2007 at 03:15 AM
Carlos, a company is required to file a financial statement every year with the Controller of Companies. The statements have to be approved by an auditor, and -- I am told -- will usually bear at least a nodding relationship to reality. In contrast to, say, Eastern Europe, where corporate filings have traditionally been shelved under "fantasy".
Note that while Jordan has its problems, gross abuse of corporate governance is not one of them. Again, sharp contrast to Eastern Europe.
Noel, Claudia is the photographer in the family. Path dependence and labor specialization.
Doug M.
Posted by: Doug M. | June 01, 2007 at 05:26 AM
Carlos, while Doug appears to have an answer to the reporting issue, I'll confess that I hadn't really considered it when I tossed that out there. I haven't done business in any place more corrupt than, say, Louisiana, so I just assumed that at least a decent read of corporate assets would be available.
I wonder if this might introduce moral hazard into the equation, though. If Jordanian books have been pretty clean, possibly it's because they haven't mattered as much? Is the corporate income tax efficient or widely dodged?
Posted by: Bernard Guerrero | June 01, 2007 at 06:16 AM
Note that while Jordan has its problems, gross abuse of corporate governance is not one of them.
Woo! Go Jordan! Do you know how they avoided it?
Posted by: Carlos | June 01, 2007 at 07:01 AM
I am definitely interested in hearing more of this sort of thing.
What is the current state of economic thinking in Jordan?
Posted by: Tony Zbaraschuk | June 01, 2007 at 11:34 AM
Interesting, Doug. Bermuda just scrapped its MCR this January. Didn't affect government fees though; they just dropped the lowest band down to zero, so even if you incorporate with a dollar's worth of capital, you have to pay $1800 a year. As to the foreigner "problem" Bermuda is quite frankly protectionist, having exempt companies that foreigners can own, and local companies that have to be 60% Bermudian owned. Only the latter can do business in Bermuda.
Posted by: James Bodi | June 01, 2007 at 03:58 PM