The Palestine-Israel Journal is a quarterly of MIDDLE EAST PUBLICATIONS, a registered non-profit organization (No. 58-023862-4).
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Editorial Board

Hisham Awartani

Danny Rubinstein

Sam'an Khoury

Boaz Evron

Walid Salem

Ari Rath

Zahra Khalidi

Daniel Bar-Tal

Ammar AbuZayyad

Galit Hasan-Rokem

Khaled Abu Aker

Galia Golan

Nazmi Ju'beh

Gershon Baskin

Edy Kaufman

Ata Qaymari

Benjamin Pogrund

Nafez Nazzal

Simcha Bahiri

Nadia Naser-Najjab

Dan Jacobson

Jumana Jaouni

Dan Leon

Anat Cygielman

Khuloud Khayyat Dajani

Izhak Schnell



Vol. 7 Nos 1&2, 2000 / The Search for Regional Cooperation

Focus

Regional Economic Cooperation: A Jordanian Perspective

A study of the past history and future potential of Jordan‘s trade relations in the region.

     by Riad Al-Khouri

After the 1994 peace agreement between Jordan and Israel, regional cooperation initiatives flourished, though the fruits of such efforts remain unsubstantial. Some of the examples include:
* The Regional Economic Development Working Group (REDWG), which operates under the guidance of the European Union (EU), formed to foster economic cooperation among the four core parties to peace — Egypt, Israel, Jordan, and the Palestinian National Authority (PNA). REDWG has tried to play a role in the peace process by promoting economic cooperation in four main sectors: finance, trade, tourism, and infrastructure. REDWG’s work has been frozen since the late 1990s, although there are now attempts at reviving it.
* The Middle East and North Africa (MENA) Economic Conferences, held annually between 1994-97. During the conference held in Amman in 1995, discussions were held pertaining to major infrastructure schemes, including a canal linking the Red and Dead seas. These schemes saw no follow-up, pending an improved political climate in the region.
* The Jordan Rift Valley (JRV) development. Initially a bilateral Jordanian-Israeli scheme supported by the World Bank, the idea was for JRV development to evolve and expand within a broader multilateral framework. Specific plans for the area covered new transport links and joint promotion of tourist destinations on both sides of the valley. Most of these have not been implemented, including, for example, the proposed Aqaba International Airport, one of the centerpieces of the JRV. (Recently an agreement has been signed to go ahead with this project.)
Another approach to regional cooperation in the context of the peace process was the Jordan-Israel-Palestine “triangle” of cross-border economic integration. This was talked about as a free-trade zone if not a full customs union, with close coordination of monetary policy, and a variety of joint institutions to manage common resources. This arrangement, based on the Benelux example, has been shelved, at least for the time being.
The major lesson for the protagonists of a Jordan-Israel-Palestine triangle is a realization of the difficulties that lie in the way of achieving a popular basis of support for such an arrangement. This cannot be obtained simply by founding supranational institutions and aiming for integrated economies. The appropriate policy for Jordan’s economic integration with Israel, for example, depends on several elements, including the time frame, the ideology, and the overall political culture.
The impact of time is directly related to the target rate of achieving integration. Eleven years have passed since Jordan’s letter of intent to the International Monetary Fund (IMF) and the beginnings of structural adjustment. Yet, myriad restrictions and problems still hamper the kingdom’s economy, and a continued slow pace of dismantling economic barriers would be inconsistent with integration with Israel.
Ideology is critical to the extent to which regional decision-makers often adopt policies that may seem economically rational. Economic rationality may thus involve the domination of Jordan by an outside power in order to “develop” the country. This, however, is socially unacceptable and politically unworkable, and in the end would be economically questionable as well.
Finally, the pattern of development must be put in the context of a general environment including both the internal forces of the economy and external conditions. In the Jordanian context, a policy toward integration is not easily practicable, because Jordan’s economy is not underpinned by a political system that stresses the individual, and its social and cultural values are not conducive to economic growth.

Bilateral Cooperation

As multilateral regional cooperation has not progressed given the problematic peace process, Jordan is, instead, attempting bilateral cooperation. The country is a good supplier and customer for its neighbors, and provides the possibility for various types of investments.

1. Jordan and Israel

Jordan enjoys competitive wage structures in
relation to Israel. Under existing conditions, although essentially political considerations and sensitivities impinge on the investment decision, certain Israeli investments in Jordan are considered promising.1 Mechanisms of industry relations and technology transfer between Jordan and Israel continue to emerge, leading to a new geographical distribution of production through bilateral arrangements such as subcontracting, joint ventures, or the relocation of industries from Israel. The newly emerging industrial patterns may result in Israel’s concentrating on selected high-technology products (geared mostly towards Western markets), and on the transfer of technology and expertise, while Jordan may continue to promote labor-intensive and/or less technology-intensive industries, such as textiles and garments.
The labor-intensive textiles and garment industry has been one of the main subjects of the impact of the peace process on Jordan, in view of its significant contribution to total manufacturing output, value added, exports and employment in the country. This industry is expected to be the one most affected by the new patterns of economic relations, particularly within the Qualifying Industrial Zone (QIZ) model being applied in Jordan.
The QIZ is any area that has been specified as such by the USA, and which has been designated as an enclave from where merchandise may enter US markets, quota-free, without payment of duty or excise taxes, and without the requirement of any reciprocal benefits. In addition, revenues earned from exports of QIZ products are fully exempted from Jordanian income and social service taxes, and imported raw materials used in their manufacture are exempted from customs duties. In many cases, this means that products produced in the QIZ can enter the USA at lower, more competitive prices than similar products from other countries.
The primary requirement is that 35% of the appraised value of a product (cost of content plus direct cost of production operations) must be contributed by a manufacturer located within the QIZ, and 65% from anywhere in the world. Thus, at least 11.7% must be contributed by the Jordanian manufacturer in the QIZ and 8% by an Israeli manufacturer (7% for hi-tech products), with any remainder of the 35% content being from production at the QIZ, the West Bank/Gaza Strip, Israel or the US; or Jordanian and Israeli manufacturers must each maintain at least 20% of the total production cost of QIZ-produced goods. Producers within QIZs also have the right to mix and match between the two requirements. Due to the success of the first QIZ, located in the north of Jordan, four additional ones have been designated. This seems to be a form of regional cooperation that is progressing, albeit bilaterally.

2. Jordan and Bordering Arab States

More than most other Arab countries, Jordan trades extensively with its neighbors. This is particularly true of the three bordering Arab states — Iraq, Saudi Arabia, and Syria — which in 1998 supplied Jordan with 13.6%, 17.2% and 99% of its imports respectively.
Trade between Jordan and these three countries is heavily influenced by political factors. However, Jordanian relations with these countries have clearly improved since 1998, and this has had an impact on commercial links.

Jordanian Imports from Bordering Arab States, 1998-9 (in thousands of Jordan dinars) (2)
   
1999
1998
   
1999
1998
Total
2,634
2,714
Iraq
310
236
Syria
35
31
Saudi Arabia
107
102

The case of Syria is particularly interesting, as a distinct thaw in relations with Jordan helped to ease the signing of a Jordanian-Syrian trade pact in 1999, eliminating customs tariffs on a wide range of goods. Under the agreement, the Jordanians and the Syrians expanded the list of duty-free goods imported by each side to about 200 items, the largest number in any agreement that Jordan has ever signed with another state.
The extensive tariff cuts agreed upon were a major step towards eventual free trade. However, Jordan retains a 35% duty on imports of Syrian garments, alcoholic beverages, biscuits and chocolates to protect its own industries, and Syria will most notably continue to exclude marble, granite and vegetable ghee from the list of over 100 Jordanian products on which it waived tariffs. This agreement could lead Syro-Jordanian trade to rise from its low 1998 total. Figures for 1999 Jordanian imports, while not necessarily indicating a longer-term trend or abstracting from factors other than the trade agreement, show this to be the case. Jordan’s imports from Syria have also risen in relative terms, now making up a higher percentage of the overall Jordanian import bill than for 1998.

Conclusion

The path created by the deliberate engineering of institutions and infusion of aid will not bring stability and prosperity to the region. The domination of the national economy by the state has, over the years, led to bloated inefficient bureaucracies in the kingdom, and its public sector has proven largely incapable of dealing with the intricacies of the open market. However, the lessons of the QIZ and of improved trade relations with bordering Arab states may be that the state has a strong role to play as facilitator, letting the private sector get on with the tasks of trade and investment.
There has been much speculation about the economic opportunities that would be available in the Middle East after a just, lasting and comprehensive resolution of the Arab-Israeli conflict is achieved. Such opportunities may initially be bilateral rather than multilateral,3 and Jordan could be in a better position than some other countries to profit from one-on-one deals with Israel. Ultimately, multilateral cooperation is clearly preferable, particularly as concerns Jordan, Palestine, and other Arab countries in the Levant. Until real peace is achieved, however, it might be better for Jordan to avoid forced multilateralism, and profit from bilateral trade and investment facilitated by the kingdom’s new and more successful diplomacy.


(1) See, for example, the chapters by the author on Jordan in ESCWA, Proceedings of the Expert Group Meeting on the Impact of the Peace Process on Selected Sectors (Beirut, 1998).
(2) Monthly Bulletin of the Central Bank of Jordan, April 1999.
(3) See, for example, Rivlin, P., “Trade Potential in the Middle East: Some Optimistic Findings,” in Middle East Review of International Affairs, Volume 4, Number 1, March 2000. This article measures potential trade involving Israel and finds that it may be more extensive than previously estimated by some.








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