Executive Summary
Qualified Industrial Zones (QIZs) are production areas designated by the Jordanian and Israeli authorities and approved by the US government. Products originating from QIZs are granted duty-free and quota free access to the US market. As the objective of these zones is to promote peace and stability through economic integration in the region, Jordanian, Egyptian and Israeli goods originating in the QIZ’s were granted un-reciprocal duty-free access to US markets. Such an arrangement was beneficial to both Jordan and Israel: Israel was able to utilize Jordan’s low wage advantages, and Jordan was able to utilize Israel’s existing market channel link in the USA, as well as its sophisticated technology and management. As a result, QIZs have been able to operate at a higher level of productivity than the rest of the industries in the region. QIZ exports have now risen to top all other Jordanian exports, making the USA Jordan’s main export destination.
Despite these successes, QIZs have not produced the benefits that were originally expected. First, the Jordanian business community has not been enthusiastic about establishing a direct link with its Israeli counterpart. Second, Israeli business has limited direct investment, and has preferred instead to deal with the QIZs on a subcontracting basis. Most investment has thus originated from outside the region, and as a result the agreement has mainly benefited third-party countries such as the USA and East Asian investors. Similarly, the effects on the Jordanian labor market have been disappointing. While it is estimated that over 30,000 jobs have been created as a result of the QIZ initiative, a large number of those positions are filled by foreign workers, rendering the effect on Jordanian unemployment rates negligible When asked why they hire foreign workers over local Jordanians, interviewed supervisors explained that foreign workers are often better trained and more committed than their Jordanian counterparts, factors that could be explained by the fact that Jordanians often have familial and social obligations. Furthermore, interviews indicated that the Jordanian labor force does not display an interest in working in the QIZs: work is low-paid, wage freezes and favoritism are common, and job security is lacking since Jordanians fear they could be replaced by foreigners accepting longer hours and lower pay. Finally, working conditions in the factories are often difficult, and workers often work ten-hour days.
Research has shown, however, that the QIZs have had positive effects on female employment rates in Jordan, as rural women now have an important means to contribute to their families’ income and increase their participation in general public life in Jordan, strengthening their overall power and self-confidence in society. Nonetheless, the QIZs are not providing these women with the training and qualifications needed to move to higher paid skilled positions. Improved salaries, as well as a streamlined incentive and raise system, could be a step towards improving the overall reputation of textile factory work in the QIZs.
The effects of QIZs on other sectors of the Jordanian economy have been limited at best. Despite the fact that QIZs use infrastructure and electricity from Jordanian businesses, the lack of raw materials in the country limits possible backward or forward linkages. Furthermore, Israel has more competitive shipping prices, so goods are shipped from Haifa rather than Aqaba. Finally, since the contract stipulates that all products must be shipped to the US, there is no domestic competition, and few Jordanian companies/businesses have benefited from the existence of the QIZs.
The recent elimination of quotas set by the Multi-Fiber Agreement (MFA) may pose some problems for Jordan’s QIZs in the near future. The elimination of the MFA will allow more competitive suppliers to increase their American market share and dominate the global market at the expense of less competitive countries. As a result, Jordan should expect to lose some of its market share as it gradually loses its preferential treatment. Moreover, since many of the QIZ investors are Asians whose home countries are facing quotas, we should expect to see a large outflow of investment funds from Jordan back to Asia. Nonetheless, while quotas have been eliminated, tariffs will remain intact. Jordan should thus focus more on high tariff products in order to maintain its comparative advantage over low tariff products.
Improving Jordan’s QIZs should also involve an attempt to foster linkages between the QIZs firms and the rest of the economy. Where feasible, steps should be taken to encourage diversification, particularly in regards to high tariff products. Finally, as global and regional liberalization proceeds, QIZs must be seen as transitional building blocks in the trade liberalization process, rather than an end unto themselves.