Growth of MENA Industries: The Textiles & Clothing Sectors in Jordan

Economic growth in the MENA region is an imbalanced area of development with considerable variations within industries and between national economies. Imad H. EL-Anis analyses the Jordanian textiles and clothing sectors in a comprehensive review of how one industry has taken advantage of trade liberalisations and economic reform to greatly transform its market value.

Since the late 1980s a move from a set of structuralist economic policies to a set of neoliberal economic and political policies has been seen in Jordan. No where is this change more evident than in the development and growth of export industries. The production and export of textiles and clothing (T&C) have become one of the leading sectors in Jordanian exports to its main export markets including the US, the MENA and other global markets.

 

The growth of the T&C sector in the Jordanian economy 

 

The textiles and garments industry in Jordan is relatively young. Prior to 1997 the sector was largely inactive and what activity existed was geared towards the domestic market as opposed to export-orientation (Kardoosh, M., 2006). The principle reason for the emergence of this sector in the Jordanian economy was a conscious decision made by the governments of Jordan and the United States to further develop their trade relations. The desire to deepen trade between the two economies came as result of the 1994 Treaty of Peace between Jordan and Israel (Kanovsky, E., 1997). The initiative to develop Qualifying Industrial Zones in Jordan had three main aims; firstly, the QIZs would require joint commercial activity between Jordan and Israel – thus helping to ‘normalise’ relations between the two neighbours and promote economic cooperation between them; secondly to provide a catalyst for job creation and FDI within Jordan; and finally to provide certain sectors of the Jordanian economy with free access to the US market – in effect as a peace dividend.

 

The QIZs would give Jordanian goods manufactured within them duty and quota free access to the US market. Out of this opportunity emerged the Jordanian textiles and garments industry which as stated above and as shown in the table below was largely irrelevant in 1997, accounting for a mere 1% of GDP. Following the initial declaration of the intention to establish QIZs in Jordan the government of Jordan through the Ministry of Industry and Trade completed a number of studies on how best to benefit from the project (Al-Shamali, Y., 2006). Jordanian manufactures in the mid-1990s were largely uncompetitive internationally and domestically and were grossly inadequate to make full use of the QIZ project. The development of the T&C industry relied heavily on the comparative advantages inherent in the Jordanian economy. These were; access to cheap semi-skilled and skilled labour, relatively well developed infrastructure including above-regional-standard road networks, and a supportive government. According to Yousef Al-Shamali, Deputy Director of The Foreign Trade Policy Department at The Ministry of Industry and Trade, “[e]stablishing the T&C industry in the QIZs was the only really viable option. There would not have been any other industrial sector which would have been able to establish itself and compete successfully in the US market – even with (the) free access.” The decision to use the QIZs to develop the T&C export industry within Jordan has thus far proved to be highly successful (see Table 5.2 below).

 

In comparison to these early levels of growth and the limited relevance to the Jordanian economy as a whole, by 2006 the sector was contributing significantly to export revenues, job creation, overall employment and GDP. In 2006 the T&C sector accounted for 9.4% of overall GDP in Jordan and 20% to overall industrial value added (Pigato, M., 2006). To provide some measure of how important these figures are it is useful to compare the Jordanian T&C industry with similar industries in other states. Here it is most useful to examine Jordan’s main competitors in the T&C export industry. These are the three major Arab MENA T&C exporting economies (along with Jordan referred to here on as MENA 4), Tunisia, Morocco and Egypt. In Tunisia, Morocco and Egypt the percentage contribution to GDP of the T&C sector in 2006 were 5.6%, 5.1% and 3% respectively. The T&C industries in these states are well established and were among the first sectors to develop as the modern economies emerged after independence from their former European patrons (Wilson, R., 1995). In Egypt, the T&C industry dates back many centuries, yet in comparison to the Jordanian T&C industry it is playing a far smaller role in the modern Egyptian economy. At the same time, contributions to industrial value added of the T&C industries in two of these three states are much higher than in Jordan; 42% and 30% for Tunisia and Egypt respectively but slightly lower for Morocco at 17%. This suggests that while there has been rapid growth of the T&C industry in Jordan the relative value added in comparison to other industrial sectors such as the pharmaceutical sector, is low. While in Egypt and Tunisia the opposite is true.

 

     Table 1: Contributions of T&C in MENA-4 Economies

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: a. Basti and Bechet (2005); b. Ghoneim (2005); c. Hamri and Belghazi (2005); d. Kardoosh and Khouri (2004)

 

 

As is shown in Table 1, contributions to employment of the T&C sector is also extremely important in MENA 4 economies. Employing low-skilled and semi-skilled workers, the T&C sector accounts for as much as one third of the industrial labour force in Egypt (approximately one million employees) and over two hundred thousand in Morocco and Tunisia each. In Jordan this figure is much lower (expected in the comparison to Egypt due to the immense difference in size of the industrial labour forces in the two states) at approximately thirty thousand employees. However, the industry is relatively young and has only been growing with consistency since 2001.

 

While the importance of the T&C sector in Jordan has grown in importance in terms of contribution to overall GDP and employment it is in the sectors utility as a source of foreign exchange that its real significance is found. In the period between 1997 and 2006 exports of T&C manufactures have grown from 1% to 32% of total exports in value terms (Al-Shamali, Y., 2006). Again it is worth comparing this figure to the other MENA 4 economies as they provide a bench mark for sector utility in foreign exchange as their T&C industries are well established and have well established links with international markets. In 2006 Tunisian T&C exports accounted for a massive 58% of total non-oil exports, while in Egypt and Morocco the figures were slightly lower at 52% and 42% respectively (Pigato, M., et al 2006). No other MENA T&C industry or, in fact, any other industrial sector has experienced such a dramatic growth in the same period.

 

Importantly, the composition of Jordanian T&C exports is relatively limited although much more diverse than the other major Arab MENA T&C exporters. In Tunisia for example, Suits Ensembles (for men, women, boys and girls) represent 47% of total T&C export revenues. At the same time, the T&C export in Jordan with the highest share of export revenues are Jerseys, Pullovers and Cardigans which make up only 28% of total T&C export earnings. Women’s and girl’s suits ensembles make up the next largest share at 20% of export earnings. While Morocco exemplifies a similar pattern to Tunisia (with women’s and girl’s suits ensembles alone comprising 31% of overall T&C export revenue), Egypt has a relatively diversified T&C industry with no single group of products surpassing 17% of total export earnings (men’s and boy’s suits ensembles). Figure 2 offers a summary of the other major product groups which are significant exports in the Jordanian T&C industry.

 

The Performance of the T&C Export Sector in the EU Market

 

As is the case for many developing economies and most industrial sectors, the global export market for Jordanian T&C products is confined to the EU and the US markets. However, this reliance on these two major markets is not evenly balanced. Jordanian T&C exports have since 1997 had very little success gaining access to the EU market and this difficulty has only been magnified by the end of the Multi-Fibre Agreement in 2005. In 2006 Jordanian T&C exports to the EU market totalled a meagre US$15.3 million. This was an actual drop from the 1997 figure of US$23 million and represented only 0.02% of the EU market share – compared to 0.05% in 1997. In 2006 Tunisia and Morocco, on the other hand, exported US$3.7 billion and US$3.4 billion worth of T&C goods respectively to the EU accounting for 5.1% and 4.8% of the market share. The largest 2006 market share went to China which exported a staggering US$25.4 billion worth of T&C goods to the EU, representing 26.9% of the market share. This level was an increase on the 1997 figure of US$13.5 billion (23.3% of market share) that was observed in 1997.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Even on the back of the Association Agreement signed with the EU in 1997 (JEUAA) Jordanian T&C exports have proven to be uncompetitive with both regional T&C exporters such as Morocco, Tunisia and Egypt – which all have Association Agreements with the EU and longer trading relationships in T&C goods – as well as global competitors such as China and other South East Asian producers. The comparative advantages Jordan enjoys, such as having access to cheaper labour than regional competitors and closer geographical proximity to the EU market than East and South East Asian competitors (Abu-Rahmeh, H., 2006) have gone largely unexploited.

 

There are two main contributing factors which have hindered Jordanian access to the EU market. The first is the relative insignificance the JEUAA has had on all Jordanian exports to the EU market. In theory the JEUAA should have led to greater two directional trade levels between Jordan and the EU. This unfortunately has largely not happened. Rather, imports from the EU have increased rather significantly but exports to the world’s largest consumer market have struggled and in some sectors, such as the T&C sector, have decreased. The primary causes of this dynamic have been the increase in import demands in Jordan due to rising levels of consumer prosperity and industrial growth and the signing of Association Agreements and broader liberalisation of EU trade with other states.

 

The Performance of the T&C Export Sector in the US Market

 

The US market for T&C goods, especially manufactured clothing has been steadily growing over the past fifteen years resulting in expanding export opportunities for the major T&C exporters. Although Jordan is a small producer of T&C goods it has not missed out on this opportunity. However, unlike the EU market with its diversified sources of T&C goods, the United States has traditionally imported the vast majority of its T&C goods from Mexico, China and the Central American Free Trade Area (CAFTA) member states. In total these three main sources accounted for 48% of total market share in 2006. Middle East and North African exporters have faired much worse. Tunisia, Morocco and Egypt for example, while being relatively important sources of the EU market, only accounted for 0.83% of the US market imports of T&C goods in 2006. Jordan on the other hand ranks as one of the more important sources of US T&C imports accounting for a market share value of 1.5% in 2006. While at first impression this is a small figure, in the context of global US T&C market import shares the young and relatively small Jordanian T&C export industry has achieved a comparatively large share of the US market in a very short period of time – 1997-2006.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The experience of the Jordanian T&C export sector has been largely based on the combination of economic comparative advantages within the Jordanian economy and governmental facilitation of trade. Unlike the experience of exports to the EU market, advantages bestowed upon the Jordanian economy have allowed T&C exports to penetrate the US market in a sustainable manner. Among these advantages are having access to large pools of unskilled, semi-skilled and skilled labour, as well as economic and political support from the government (Abu-Rahmeh, H., 2006).  Jordan does not possess the advantage of close geographic proximity with the US market as it does with the EU market and is therefore disadvantaged in this way. It would not, therefore, be surprising to most observers if it was the case that Jordanian T&C exports enjoyed greater success in the EU market than in the US market. However, as has been mentioned above there are certain disadvantages the T&C sector has encountered in accessing and competing in the EU market. These disadvantages do exist in the relationship with the US market, however, the mechanisms by which they are overcome vary greatly.

 

In much similarity with trade liberalisation in the T&C sector in the EU, the United States has also completed a large number of agreements aimed at providing access to its market for foreign exporters. The US market is indeed more open than that of the EU when T&C imports are concerned (Volpe, A. and Weil, D., 2004). There also exist other similarities between the two markets; the US market has integrated with those of Mexico and Canada through the mechanisms included in the North American Free Trade Area (NAFTA) agreement; the US market has witnessed rapidly increasing imports of T&C goods from China and South East Asia (Gibson, D., 2005); and liberalised trade has been promoted with the US market’s closest neighbours and T&C sources in South America. This latter point is shadowed by the increased integration of the EU with its neighbours to the south in the Mediterranean region. In the case of the T&C exports to the EU the Jordanian experience has been one of decline and stagnation. Faced with similar circumstances the Jordanian T&C export sector to the US market since 1997 has been one of dynamism and growth. This is due to one simple difference in the mechanisms of trade facilitation provided for by cooperation between the governments of Jordan and the United States that does not exist between the government of Jordan and the EU. This difference is grounded in the seemingly urgent and highly solidified commitment to promoting US-Jordanian trade in general.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US-Jordanian trade had increased profoundly in the past decade (due to political and strategic considerations) and now acts as a model of US trade policy with the MENA region. Furthermore, the political and economic reform embarked upon by the government of Jordan since 1999 has been supported by the success of the Jordanian–US trade relationship, not least of all for reasons of legitimacy. This dual urgency in promoting trade between the two states led to the mechanisms of special economic zones and the Free Trade Agreement (JUSFTA).

 

The Qualifying Industrial Zones and Industrial Estates

 

The Qualifying Industrial Zones (QIZs) in Jordan were initially established following the signing of the Treaty of Peace between Jordan and Israel. Within the treaty were a number of articles stipulating the requirement for the implantation of a number of joint projects between Jordan and Israel. The creation of a number of QIZs which would act as economic bridges between the two markets was one of these such requirements. In brief the QIZs were established as designated industrial estates where all goods produced therein would receive duty- and quota-free access to the US market. The conditions set upon the production of these goods revolved around the rules of origin and percentage added value. In order to receive unrestricted access to the US market any goods produced in the QIZs would have to have a certified amount of material input of a minimum level from the Israeli economy (8%) and a minimum value added from the Jordanian economy (35%). Certification of these requirements is issued by a joint commission consisting of Jordanian and Israeli representatives and government bodies.

 

Initially the QIZs witnessed little growth, mostly due to the lack of governmental support on behalf of both the Jordanian and Israeli regimes as well as a fundamental lack of capacity.

 

Figure 3: Jordanian T&C Exports to US and EU

Markets 1997 – 2006 in US$ Millions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Department of Statistics – Jordan.

 

 

The QIZ projects were not the central tenet of economic policy and export activity in Jordan in their first three years. Nevertheless, with increasing exports from the zones, and previously unseen levels of FDI flowing in to them, the new impetus placed on economic reform and export led growth which King Abdullah’s rule introduced, the QIZs gained in importance significantly. Table 5.3 shows the growth of the number of QIZs and the rise in export earnings from them from 1997 to 2006. According to Mohamed Atmeh by 2000 it was believed that there were two main benefits of the QIZs. The first was the potential for job creation within them and in the broader economy as a whole as a result of greater activity in sectors pivotal to the operation of the QIZs (such as transport and services). The second, Atmeh described as “…the very tempting access to the US market for foreign investors.” He continued to clarify that the “….government realised that vast potential for short to medium term investment existed. It was assumed that this investment would be focused on the setting up of short to medium term projects to gain quick access to the US market for a limited period of time. By this it is meant in sectors like clothes and other textiles, where quick production could be established with limited capital requirements and limited capital gains and risk.” 

 

As indicated above, the initial assessment of the government of Jordan regarding how to utilise the QIZs resulted in the decision to foster the growth of a T&C exporting sector. By the turn of the century this was coupled with the private sector’s interest and growing investment in the T&C sector within the QIZs (see figure 5). The result has been the overarching dominance of the QIZs by the T&C sector and the spread of the sector into the Jordanian economy as a whole through specially constructed industrial estates. It is important to note that industrial estates in Jordan are not QIZs. However, the 2001 implementation of the JUSFTA has largely negated this fact as the vast majority of T&C goods now enjoy duty and quota free access to the US market (Cassing, J. and Salameh, A. M., 2006).

 

The first industrial estates were established in Jordan in the early 1960s, prominent among them was the special economic zone established in Aqaba in 1963. However, slow economic growth and industrialisation through the 1970s and 1980s meant that the growth of industrial estates was negligible over this period. Further more, the governmental concentration on structural policies aimed at import substitution rather than export led growth hindered investment in the industrial estates which had been established.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There are currently just over three-hundred T&C manufacturers operating in Jordan. Of these ninety-two operate within the QIZs and the majority of the rest are located within industrial estates. While the dominance of the T&C manufacturers in terms of overall numbers lies with the industrial estates, dominance in terms of value is still firmly in the QIZs. In 2006 T&C exports from the QIZs (only to the US market) totalled US$1.06 billion whereas T&C exports form the industrial estates to the US market only totalled a small fraction of this. The difference in value of exports is attributable to two key factors. Firstly, the main T&C manufacturers have been operating in the QIZs for much longer than the T&C manufacturers in the industrial estates. The infrastructure and operations were being established in the QIZs from 1997 whereas in the industrial estates this happened several years later. Secondly, the growth of the T&C sector has slowed down in the last two years meaning further growth in the industrial estates has been limited. The main advantage the industrial estates do have over the QIZs is the continued strengthening of the relationship between public and private actors. This relationship is likely to continue and promote activity in the industrial estates in general including the T&C sector.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary

 

The Jordanian economies utilisation of a number of comparative advantages as well as governmental support for export manufactures has led to a dramatic expansion in the T&C sector. The export of T&C goods to the US market in particular has seen a rapid and sustained increase in quantitative and monetary value. The conclusion of a number of bilateral agreements, securing access to goods produced in Jordan to the US market has been complemented by successful private sector investment. The result has been increased exports, revenue earnings and horizontal capital flow within the Jordanian economy.

 

Bibliography

 

Kardoosh, M., 2006, The Institutional Dimension of the Success of Jordanian QIZs. Jordan Centre for Public Policy Research and Dialogue.

 

Kanovsky, E., The Middle East Economies: The Impact of Domestic and International Politics, in The Middle East Review of International Affairs, Volume 1, No. 2 - July 1997.

 

Interview with Yousef Al-Shamali, Deputy Director of The Foreign Trade Policy Department, Ministry of Industry and Trade. Interview held on 26.12.06, Amman, Jordan.

 

Pigato, M., et al, 2006, Morocco, Tunisia, Egypt and Jordan After the End of the Multi-Fibre Agreement: Impact, Challenges and Prospects. Social and Economic Development Sector Unit - Middle East Region: World Bank.

 

Wilson, R., 1995, Economic Development in The Middle

East, Routledge: Oxon.

 

Interview with Halim F. Abu-Rahmeh, CEO of The Jordan Exporters Association, held on 27.12.06, Amman, Jordan.

 

Volpe, A., and Weil, D., 2004. “The Apparel and Textile Industries after 2005: Prospects and Choices.” Harvard Center for Textile and Apparel Research, Cambridge, MA.

 

Gibson, D., Playing Second Fiddle in China, in WA Business News, October 13 2005.

 

Cassing, J., Salameh, A. M., 2006, Jordan – United States Free Trade Agreement Economic Impact Study: Searching for Effects of the FTA on Exports, Imports and Trade Related Investments. USAID – Jordan.

 

Interview with Yousef Al-Shamali, Deputy Director of The Foreign Trade Policy Department, Ministry of Industry and Trade. Interview held on 26.12.06, Amman, Jordan.