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Impact of Qualifying Industrial Zones on Jordan

Impact of Qualifying Industrial Zones on Jordan. Part of a Joint Research Project Supported by the UNCTAD’ VI By: Talib Awad Professor of Economics The University of Jordan May 2009. Objectives & Methodology.

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Impact of Qualifying Industrial Zones on Jordan

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  1. Impact of Qualifying Industrial Zones on Jordan Part of a Joint Research Project Supported by the UNCTAD’ VI By: Talib Awad Professor of Economics The University of Jordan May 2009

  2. Objectives & Methodology • 1- The main objective is to assess the impact of QIZ on several key variables including: • Investment & Employment, exports, technology transfer, forward and backward linkages throughout the economy • Compare the Jordanian QIZ experience with that of Egypt • 2- The study applies descriptive and analytical approach utilizing data and information available for the period 1998-2008.

  3. CONTENTS • 1- What is QIZ agreement • 2- Introducing Jordanian QIZ • Analysis of QIZ effects : - investment & Employment effects - Exports effect - Technology transfer & the creation of forward backward lineages • Conclusion and Policy Implications

  4. What is the Qualified Industrial Zones • According to the Qualified Industrial Zones (QIZ) arrangements goods that are jointly produced by Israel and either Jordan or Egypt are entitled to enter the United States duty free without any quota limit • To qualify a product in the QIZ, contents of any product produced in the QIZ must represent a minimum of 35% of the appraised value • 20% : (12%) must come from Jordan and (8.0%) from Israel. And 15% may be materials from any QIZ member. • The remaining 65% can come from anywhere in the world

  5. Jordanian QIZ • Jordan signed the QIZ agreement in 1997 and the first zone designated in Jordan as QIZ in March 1998 • Jordanian QIZ total value of investments reached to $US 342,3 million in 2007 • The textile and apparel industry has dominated Jordan’s QIZ with ready-to-wear garments represents more than 90% of all QIZ investment activity and exports • Most QIZ investments in garment manufacturing factories originally came from larger multinational firms, based in Hong Kong, Taiwan, Pakistan, India, and Sri Lanka.

  6. Investment Effect of QIZ

  7. Investment Effect • Annual invested capital has accelerated by more then 30 times during the period, increasing from JD 9.1 million in 1999 to its highest level at JD 244.5 million in 2007 • The steady increase in the value of investment during the period is healthy sign indicating either to the expansion of existing investments and or new FDI

  8. Employment Effect of QIZ

  9. Employment Effect • Only about one quarter of the 40,000 total QIZ employment is Jordanian. The rest of them are cheap labor imported from Asian countries • QIZ has succeeded in increasing women participation in workforce ( 60% of the Jordanian working in QIZ are females) • The share of foreign workers had increased from 30% in 2001 to more than 75% in 2009 (Reasons: lack of trained workforce, social and behavioral factors, and the exclusion of QIZ laborers from the recent raise of the minimum wage level)

  10. Exports Effect of QIZ

  11. Exports Effect • QUIZ exports as percentage of total merchandise increased from less than 1% before 2000 to more than 14% in 2006 • Most of the Jordanian value added contribution (roughly 12%) is limited to minor sources such as wages salaries and depreciation • QIZ exports of apparel and garment are highly dependent on imported fabrics and other intermediate inputs. • QIZ exports potential is constrained the high degree of concentration in terms of scope and direction

  12. Technology Transfer • Most of the qualified products in the QIZ are garments, luggage and textiles which uses standard and static low-tech assembly technology • Some companies working in QIZ preferred to give training to foreign workers rather than local workers due to the high cost of domestic training programs and due to lack commitment by domestic workers • Foreign investors were selective in employing domestic workers and usually Jordanians were allocated to low skill tasks

  13. QIZ Backward and Forward Linkages • Most investments are confined within the separated QIZ and nearly all of the required inputs for manufacturing are imported • QIZ provision encourages assigning tasks involve cutting, sewing and finishing operations, mainly to domestic workers, which contribute the lowest value in the production chain • The limited domestic contribution to value added deprived the garment industry a chance to vertically integrate, or adopt a value chain • All of QIZ output is directly exported to the US market, it did very little to promote domestic competition

  14. Impact on the Arab-Israeli Peace Process • Although QIZ in Jordan has increased the volume of bilateral trade, overall totals remain modest, the percentage of total exports reached a maximum of 5.9% in 1999 and declined since after to lower than 3% • China, not Israel or Jordan, is the main beneficiary of the US-Israel-Jordan QIZ agreement • out of each dollar worth of Jordanian QIZ exported to the US, 68 cents goes to cover Chinese inputs • The effects of QIZ on regional economic integration and on the peace process are only marginal if any

  15. Jordanian VS Egyptian QIZ • No comparable data on employment, investment, and exports • Jordan has the lead in the QIZ program since operation started earlier in 1997, while Egypt started in 2004 • Jordan QIZ has advantage over Egypt QIZ since Israeli content is slightly lower in Jordan's QIZ

  16. Jordanian VS Egyptian QIZ • However, the existent of a large and diversified Egyptian textile industry provide better potential for integration and clustering • All operating cost ingredients (labor, Water, electricity, natural gas, and buildings) are cheaper in Egypt compared to Jordan • Companies exporting from Egypt enjoy reduced shipping costs through that country’s access to the Mediterranean, instead of Aqaba or Haifa.

  17. Conclusions • QIZ most notable effect is promoting the nominal value of Jordanian exports • Its contribution to local investment and employment remained limited and even deteriorated over time due to substituting foreign workers in place of Jordanian workers • The presence of foreign labor and the lack of interaction between the foreign companies and local firms have prevented Jordan from integrating the operating industries in the zones into the overall economy

  18. Conclusions • QIZ activities are highly concentrated in textiles and apparel and dependent on US market development • QIZ contributed very little to technology transfer and domestic labor training

  19. Policy Response • Enhance domestic labor skills (training programs) to promote national employment by QIZ • Enforce the new minimum wage level at QIZ • Encourage horizontal and vertical integration of QIZ in order to maximize the interaction with rest of the economy • Encourage the attraction of a complementary national, Arab, and foreign investments to achieve a more balanced and diversified QIZ

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