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QIZs and sustainable development in the Middle East

The mantra of 21st century development economics seems to be "sustainability." As oil and other booms come and go, bubbles are created and burst, leaving once-flourishing economies in debt and with high unemployment. To counter this depressing cycle of rags to riches and back again, free trade is mooted as an alternative that would attract investment and lead to higher exports in the context of sustainable growth.

Moves are thus being made worldwide, and increasingly in the Middle East in particular, to liberalize international commerce. This, it is argued, will lead to more investment and diversified and higher exports - sustainably.

An example of this trend is the Qualifying Industrial Zone (QIZ) export model introduced by the United States to the Middle East in the mid-1990s. QIZ essentially extends the benefits of the US-Israel FTA Implementation Act of 1985 to include exports from geographically circumscribed areas, specifically in Middle East countries that are not at war with the Jewish state. For Jordan in particular, the QIZ rules stipulate that a minimum of 35 percent of the exported good's value must be composed of local content: 11.7 percent of this must be Jordanian and 8 percent must be provided by Israeli manufacturers (7 percent for high-tech products); the remainder to reach the 35 percent value-added requirement can come from Jordan, the U.S., Israel, and/or or the West Bank and Gaza. As a result, from almost nothing in the mid-90s, Jordanian exports to the U.S. have surged to not much less than a billion dollars in 2004.

QIZs so far exist only in Jordan, though under U.S. legislation it is permitted to establish such schemes in Egypt and Palestine. In fact, the process of doing so in the former has now been launched by an American-Egyptian-Israeli agreement signed in Cairo on Dec. 14. Details on Egypt's bid to host QIZs had been bandied about since early 2004, when a delegation of Egyptian manufacturers visited Israel to push forward negotiations for a QIZ arrangement among Israel, Egypt, and the U.S., along the lines of the Jordanian accord. However, it was only in the wake of the release by Egypt of Israeli spy Azzam Azzam that the deal was clinched, an indication of how politicized - and maybe unsustainable - the QIZ process is. The Turks have also shown interest in QIZ. In April, Turkish State Minister Kursad Tuzmen suggested that a QIZ agreement was imminent, though nothing concrete has yet emerged. However, if the Egyptian case is anything to go by, we shouldn't be surprised if the twists and turns of Middle East diplomacy suddenly result in a Turkish QIZ.

The Jordanian experience offers these and other countries important lessons. Even though QIZs have given Jordan undeniable benefits in terms of employment and foreign exchange earnings, these zones have as yet shown little real evidence of promoting technology transfer to the domestic economy or facilitating industrial upgrading to higher value added export activities. Clustering is also something that has yet to occur in Jordanian QIZs. The key notion here is that company productivity' depends on the actions of firms with which it has significant economic relationships.

The general idea is that a firm's productivity is higher if it belongs to a geographic cluster of interconnected companies and institutions in a particular field (e.g. Silicon Valley). Clusters encompass an array of linked industries and other entities important to competition, often extending downstream to channels and customers, and laterally to manufacturers of complementary products and to companies in industries related by skills, technologies, or common inputs.

Against this backdrop, it remains unclear how QIZs as they are found in Jordan today can facilitate industrial transformation. A key point is the coherence of the policy behind QIZs. In other words, QIZs have to be conceived and implemented within the context of an overall export and investment promotion strategy.

The integration of QIZ into government strategy in Jordan may not be as strong as it should, though the imminence of the Multi-Fiber Agreement dismantling at end-2004 may now be pressing Jordan's policy-makers to take a closer look at QIZ within the context of foreign trade as a whole. Had the whole approach to QIZ been better planned and implemented from the beginning, it is possible that deeper and more sustainable backward linkages and technology transfer could have taken place.

No matter how successful present performance might be, the outlook for Jordan's QIZ is uncertain. For a start, the Egyptian threat is now real, and some investors have indicated that once Egypt gets a QIZ, they will be out of Jordan quickly (in as little as three months according to some). Of course, such a move might be natural: going to a country such as Egypt that manufactures many of its own raw materials for garments and has generally lower costs of production is normal for any industry, especially a footloose one that happened to come to Jordan because of a concessionary trade arrangement. In any case, even in the event that the threat from Egypt does not prove to be lethal, trade concessions in other economies near Jordan could still act to lure QIZ firms away.

Ironically, such a worst case scenario could have been - and maybe can still be - avoided by building linkages that would help create an efficient cluster. Unfortunately, the situation among Jordanian QIZs suggests that this may not happen. For example, some QIZ manufacturers have indicated that on the rare occasions when they approach Jordanian firms for greater co-operation than that absolutely mandated by the rules of cumulation, the response has not been one indicating a desire to build a longer-term relationship with the foreign company. Thus, those foreign firms prefer to deal with Israelis who offer a more cost-efficient method of supplying inputs based on a steadier relationship. By contrast, some Jordanian firms have used hit-and-run tactics designed to gouge the maximum short-term profit out of a foreign buyer, thus intimidating him and preventing the formation of a long-term link.

In conclusion, it should be stressed that although QIZs contain elements of potential sustainability that could still lead to the emergence of a continuing rise in Jordanian exports, their situation now is precarious. Transfer of technology and the creation of backward linkages are clearly important parts of the "Cluster Scenario" that would be an ideal longer-term result of the arrival of these garment firms in Jordan at the turn of the 21st century. To profit effectively from their presence and the whole QIZ model, Jordan clearly needs to do more.

It is still not too late to help QIZs make a positive impact on the country's export regime, but if vigorous action is not taken now, the result will have been an unsustainable spike in Jordanian exports for a few years. That would be beneficial for a few, but hardly enough compared to what the country needs for its long-term development.

The authors are respectively director of MEBA, and research director of the Jordan Center for Public Policy Research and Dialogue. This article was based on the paper "Qualifying Industrial Zones and Sustainable Development in Jordan" which won a prize for Best Policy Oriented Research at the recent annual meeting in Beirut of the Cairo-based Economic Research Forum for the Arab Countries, Iran, and Turkey

Beirut,12 27 2004
Riad Al Khoury
The Daily Star
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