Cablegate: Jordan and the Qiz Experience

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UNCLAS SECTION 01 OF 04 AMMAN 005485

SIPDIS

STATE FOR NEA DAS CHENEY
STATE PASS USTR FOR NED SAUMS, DOUG BELL
STATE PASS USAID FOR MSCOVILL
USDOC FOR 4520/ITA/MAC/ONE/P.THANOS

E.O. 12958: N/A
TAGS: ETRD EINV JO IS
SUBJECT: JORDAN AND THE QIZ EXPERIENCE

REFS: A) AMMAN 3761; B) 01 AMMAN 5728

1. The Qualifying Industrial Zones (QIZ) initiative has had
a net positive, and increasingly widely-felt, effect on
Jordan's economy, political dynamics, and social structure.
While the success of the initiative to date is irrefutable,
the QIZ's will have to face a number of hurdles in the near
future. These include continuing regional instability, the
rise of competing tariff preference programs in other parts
of the world, and the wholesale reconfiguration of the
global textile market in 2005 with the advent of the WTO's
multifiber arrangement (MFA). The QIZ's are well-equipped
to meet these challenges and, in combination with Jordan's
Free Trade Agreement with the U.S., will maintain a place
for Jordan in the global textile production market.

WHAT THE INITIATIVE IS

2. The QIZ initiative was created by Presidential
proclamation in November 1998. It extended benefits of the
U.S.-Israel Free Trade Agreement to certain industrial zones
in Jordan identified and agreed upon by the U.S., Israeli,
and Jordanian governments. Goods produced in such zones
were given duty-free access to the U.S., provided a certain
percentage of the value added of the good came from the QIZ,
Israel, and/or the West Bank/Gaza, in the following
proportions: 11.7% QIZ origin; 11.7% Israeli origin; 11.6%
QIZ/Israeli/WB/Gaza origin. The balance of the value of the
good could be from anywhere in the world. In February 1999,
the Israeli and Jordanian governments amended these
percentages on a temporary basis, reducing the required
Israeli input to 7% for high-tech goods and 8% for all other
goods for five years. (Note: The QIZ concept has been on
offer to Egypt as well since 1998, but Egypt has not yet
requested QIZ designation for any industrial parks. End
note.) The initiative was designed to provide an incentive
for Jordanian and Israeli businesses to develop partnerships
or even joint ventures in QIZ parks, thus creating a
constituency in favor of normalization within both
countries' business communities.

ECONOMIC IMPACT

3. The QIZ's have enjoyed enormous economic success, due in
large part to the initiative's unforeseen attractiveness to
foreign textile producers who came to the QIZ's both to
escape quota ceilings in their own countries and to take
advantage of tariff breaks of 30% or more on a wide range of
apparel products. The speed and effectiveness with which
the QIZ's have sparked export-led growth in Jordan is
impressive: in 1999, total Jordanian exports to the U.S.
were barely $13 million. In 2002, QIZ exports to the U.S.
are estimated to reach $400 million. Because of the QIZ's,
the U.S. is now Jordan's largest export market, and Israel
(Jordan's other market for QIZ goods) is Jordan's fifth
largest export market. The initiative has created over
21,000 new jobs directly, and an unknown level of indirect
employment. The QIZ's have also attracted over $200 million
in new investment from some 11 countries, including Jordan,
Israel, the U.S., the UAE, India, Pakistan, and China/Hong
Kong/Taiwan. While the bulk of QIZ investment initially
came from East Asia, there are now as many Jordanian QIZ
exporters as there are from any other investing country.

4. These national-level figures come into even sharper
focus at a regional level. QIZ parks are routinely becoming
engines of growth in their communities. The QIZ in Irbid,
Jordan's third-largest city, draws laborers from a half-
dozen nearby communities, and QIZ exports from the Al Hassan
Industrial Estate account for 80% of the park's exports.
Previously, Al Hassan was primarily home to small industrial
and engineering concerns linked to the Iraqi market. In
Zarqa, Jordan's biggest industrial governorate, the impact
is even more noticeable. The private sector-run QIZ park in
nearby Al Dulayl, despite a slow start, is now the clear
production leader for the region. Al Dulayl's exports
account for 50% of all exports from the governorate. Even
regions without functioning QIZ parks benefit from the
program. The port of Aqaba receives most of the imports of
inputs for QIZ goods, and fully 40% of QIZ exports use Aqaba
as well. This translates into jobs for truckers and port
workers, jobs which had been scarce in the years following
imposition of sanctions on Iraq.

5. At the local level, the QIZ initiative is having perhaps
its strongest, yet least-publicized, impact. In Irbid, QIZ
exporters put $2 million in wages into the local economy
each month. The multiplier effect of these wages is felt in
the retail sector, the transportation sector, and the food
and personal services sectors in the city and beyond, to
name just a few. While no systematic study of these
ancillary benefits has been undertaken, the anecdotal
evidence of increased income growth can be seen on the
streets in new goods in shops, new business and residential
construction, and the like.

6. The QIZ experience has also had proven structural
benefits. It is creating a trained industrial labor force
on a large scale for the first time ever. It has also given
government and private-sector actors a crash-course in
investment promotion. The improvement in Jordan's ability
to sell itself to foreign investors, particularly in the
private sector, has been marked in the past three years.
The private sector-run Al Tajammouat QIZ outside Amman is
the best example. A relative late-comer to the QIZ game,
Tajammouat's management has aggressively marketed the park
in East and South Asia. As a result, Tajammouat is now home
to more QIZ exporters than any other QIZ park (including the
original park in Irbid). In fact, Tajammouat's investment
promotion officers have helped train the usually
lackadaisical Jordan Investment Board in promoting the
QIZ's. Finally, the initiative is providing technology
transfer, helping to create in Jordan a cadre of business
managers, accountants, line supervisors, and workers who
understand global standards for quality, timeliness of
delivery, and dependability. Such tech transfer is also
visible in the creation of these new, modern industrial
parks themselves, which will help Jordan to attract non-QIZ
businesses in the future to take advantage of the FTA.

THE POLITICAL IMPACT

7. The political impact of the QIZ's has been more
measured, but notable nevertheless. At a macro level, the
QIZ's have helped to moderate somewhat debate over
normalization. As early as 2000, it was not uncommon to see
editorials sharply criticizing QIZ's because of the Israeli
content requirement, calls for the discontinuation of the
program, blackballing of businesses investing in QIZ's, and
the like. With the success of the initiative, notably the
jobs it has created, that criticism has all but disappeared
from the English-language press, and is far more muted in
even the more vitriolic Arabic papers. It is becoming
increasingly difficult for the Muslim Brotherhood, for
example, to call for the destruction of an initiative that
is providing good incomes for thousands of families, many of
them in traditionally poor, conservative communities. Even
at the lowest points of the Intifada, when Jordanian
opposition groups were calling for breaking of diplomatic
relations with Tel Aviv, the QIZ's were given barely a
mention. While there is still underlying discomfort with
QIZ's among many conservative Jordanians, and while many
Jordanian businessmen still shy away from QIZ investment
(either in opposition to Israeli participation or fear of
being blackballed for dealing with Israel), the public
debate over the relative merits of the QIZ's seems to have
been won by moderate elements.

THE SOCIAL IMPACT

8. This is perhaps the most interesting, unforeseen, impact
of the QIZ's. Some 70% of QIZ workers are women, and a
significant percentage of those are new entrants into the
workforce. In addition, many of these women come from
small, traditional villages. Scores of women interviewed by
the embassy reported an improved sense of self-worth, a
greater feeling of independence, and a greater degree of
overall satisfaction compared to their previous work in the
home. This increased sense of empowerment has found form
in, among other things, women's discussion groups formed at
some factories in at least one QIZ park, where women say
they can talk about social and political issues that would
be frowned upon back in the village. Limited interviews
with families have shown that, in many cases, a number of
women in the same family often take jobs in QIZ's , thereby
greatly increasing family income - especially in families
where the males have been jobless for some time. The base
rate for a QIZ worker is Jordan's minimum wage of about
$112/month, but in reality labor competition has driven
those rates up to as much as $200-$250/month. These changes
have of course created some stresses, notably in families
where women out-earn men, and in conservative family units
where the patriarch may force women in the family to quit
jobs or control their income through the use of direct-
deposit into patriarch-controlled bank accounts. In
addition, many young women who take QIZ jobs leave the
workforce upon marriage, creating a turnover and training
problem. These attitudes, though, are beginning to shift.

ISSUES AHEAD

9. The Jordanian government will have to face a number of
procedural and structural issues to maintain the health of
the QIZ's in the coming years. Most immediately, they will
need to renegotiate input percentages with the Israeli
government. The 8% input level reverts to 11% in February
2004, and current investors are already howling about the
negative impacts of returning to the higher levels. Jordan
has an interest in, de minimus, maintaining the 8% level, or
in restructuring the percentages to allow for more flexible
application of the Israeli input rule - both to keep current
investors and attract new ones. To their credit, the
Jordanian government has for the first time framed this
issue in terms of benefit to Israel of restructuring the
regime, arguing that doing so will substantially increase
investment and broaden production into new product lines,
which would mean more business for Israeli firms as volumes
increase.

10. More generally, Jordan must cope with the rise of
competing tariff preference programs in other parts of the
world. The Caribbean Basin Initiative and the Africa Growth
and Opportunities Act are both fighting to attract the same
pool of new investors from South and East Asia. Jordan will
need to do an even better job selling itself, and will need
to further improve the functionality of the QIZ paperwork
process, to ensure they can continue to attract those
investors. So far, Jordan has been fairly successful at
trumping these two competitors. Another concern for Jordan
is the possibility of a Turkish-Israeli QIZ. Domestic U.S.
textile concerns make it unlikely that any such QIZ would
include the textile sector, but a Turkish QIZ could steal
potential higher-end manufacturers away from Jordan down the
road - investors Jordan has not been successful in
attracting so far.

11. Politically, the QIZ's will continue to be affected by
instability in the region. Instability in either Iraq or in
the West Bank/Israel has a negative affect on attracting new
investors. This has been particularly true in the West
Bank, where spikes in Israeli/Palestinian violence have
correlated exactly with drop off's in new investor interest.
However, none of the turmoil to date has affected existing
investor interest. None of the spikes in violence resulted
in lost production or sustained lost access to Israeli
inputs or the port of Haifa. Partly as a result of the
ability of QIZ producers to thrive even during instability
in the West Bank, new investor interest has traditionally
returned to the QIZ's about three months after each spike in
violence. In the long term, both Jordan and Israel have an
interest in making sure QIZ production is unaffected by
instability in the West Bank. Thus we can expect both sides
to work hard to make sure access to inputs is maintained and
the northern border crossing to Haifa remains open.

12. Internally, Jordan's biggest challenge will be
continuing to be able to provide a trained industrial labor
force to a growing list of interested investors. Industrial
labor training programs in Jordan are underfunded and poorly
targeted. Most investors train their own employees, and
wage competition has started to be felt in the more
established QIZ's in Irbid, Zarqa and Amman as the most
highly trained workers can now command more than double the
normal wage. While a labor squeeze is not yet a serious
problem, it may not be far off, and could slow investment
interest in the country. The kingdom recently took initial
steps to improve and expand industrial labor training
through a joint Labor Ministry/Armed Forces training
program, but much more needs to be done. On a related note,
the QIZ's continue to experience periodic isolated episodes
of labor complaints, usually surrounding payment of wages to
expatriate workers. While these incidents remain few, they
are still an irritant that the GOJ will need to monitor and
take corrective action on as necessary to avoid any labor
stigma being attached to the QIZ's.

13. The biggest structural challenge for the QIZ's, though,
is the entry into force of the WTO multifiber arrangement in
2005. On January 1 of that year, quotas on textile imports
into the U.S. will be eliminated, which will give low-cost,
high volume producers like China and Pakistan a massive
advantage in the textile sector. Jordan's challenge will be
to maintain its current investors and try to attract new
ones in a far more competitive global textile market. A
number of potential new investors interviewed by the Embassy
have indicated that, even in the post-2005 environment, they
would be interested in establishing facilities in Jordan.
Many of them believe that U.S. import quotas will be
replaced with increased duties, either under safeguards
measures or anti-dumping cases. Should this be the case,
Jordan's tariff benefit under the QIZ's will be even more
pronounced. In addition, many producers have a policy of
diversifying their sources of production to hedge against
instability in any one country. Thus it appears Jordan,
with aggressive management by the government, will be able
to maintain a viable textile sector even after the
implementation of the multifiber arrangement in 2005.

THE FTA AND THE QIZ'S

14. The U.S.-Jordan Free Trade Agreement will, by 2010,
eliminate tariffs on all textile products. Thus, eventually
the QIZ's will be anachronistic as the FTA matches tariff
breaks and provides for more straight-forward rules of
origin (i.e., no Israeli input requirements). Such a
distinction will matter little for Jordan's economy or
ability to attract investment, as its tariff preferences
into the U.S. market relative to third countries will remain
the same. However, if Israel hopes to continue to reap the
political and economic benefits of the QIZ's it will have to
scramble to keep Jordan-based textile producers interested
in the QIZ initiative. Such an interest is not nearly so
pressing for Jordan, whose main benefit from the QIZ's has
been jobs, investment, and technology transfer -- all things
that will continue under the FTA.

COMMENT

15. The QIZ's are an important success story for Jordan and
for the ability of economic cooperation to foster political
cooperation. They have also had a number of unintended -
and overwhelmingly positive - consequences, from industrial
labor force and investment promotion training to women's
empowerment. Growth in new businesses has slowed from its
early heyday, due in part to continuing regional instability
and constraints on availability of trained labor. In
addition, the uncertainty of the post-2005 global textile
environment is legitimate cause for pause in some Jordanian
circles. Nevertheless, the QIZ initiative continues to draw
interested textile sector investors and to lay the
groundwork for attracting investors under the FTA.
GNEHM

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