In the 21st century, the problems of Arab industrial exports have been aggravated by more open markets. In particular, the region’s textile and clothing (T&C) industry is in flux, with strength and consolidation of the market position of some producers — notably Egypt and Jordan — and the decline of others, including Lebanon.
As a result of the Middle East peace process, Jordanian and Egyptian manufacturers have obtained a favorable status in the lucrative American market through the Qualifying Industrial Zone (QIZ) agreements, which have been instrumental in boosting their exports of clothing to the US. Jordan in particular has seen its garment sector expand rapidly over the past decade under QIZ agreements.
Since the mid-1990s Jordan began a more open trade and investment policy, negotiating a QIZ trade accord with Israel and the United States — among other agreements made with individual countries or trade blocs, not to mention accession to the World Trade Organization. This has resulted in expansion of Jordanian exports, especially garment sales to the US, which have soared under QIZ. However, this overlooks the issue of backward linkages fostered between assembly operations and the domestic economy and the extent of technology transfer. QIZ is a boost to exports and new jobs, but the zones still rely on foreign workers and on importing a large share of intermediate inputs. QIZs have offered little by way of the industrial transformation they are designed to promote. Clustering is also something that has yet to occur in Jordanian QIZs. The key notion here is that a company’s productivity is higher if it belongs to a geographic cluster of interconnected companies and institutions in a particular field (e.g. California’s Silicon Valley in the information technology sector).
Can Jordan’s QIZs facilitate industrial transformation? QIZs have to be conceived and implemented in the context of an overall export and investment promotion strategy of the government. QIZs were not introduced as a coherent part of Jordan’s trade policy, though QIZ privileges being later granted to Egypt have pressed Jordanian policymakers to take a closer look. Had the whole approach to QIZs been better planned and implemented from the beginning, it is possible that better backward linkages and technology transfer could have taken place.
Lebanon provides a sharp contrast. Whatever else may be going on in the Lebanese economy, industry has been faced with major challenges in the past decade or so and these are likely to grow. The country’s T&C sector in particular is suffering from regional and international competition. As late as 1995, new T&C factories were being licensed in respectable numbers. In that year, the sector saw 28 new plants being set up, creating close to 300 new jobs, but the trend soon reversed. In the mid-90s, the Lebanese T&C sector included over 3,600 factories. Today the figure is under 600. The total T&C workforce in 1994 was over 22,000, but has now fallen to less than 7,000, while output in that year was $428 million compared to a figure now of less than $177 million. Exports have also stagnated. In 1996, they stood at $92 million or close to 13% of the country’s industrial sales abroad. By 2006, the comparable figures had fallen to $87 million and about 4%. By contrast, in that year Jordan’s QIZ exports to the US were around a whopping $1 billion.
Until the civil war started in 1975, Lebanese industrial products, including T&C, competed relatively well in foreign markets, especially in regional Arab economies. However, the immense destruction suffered during the war badly affected the manufacturing sector, with many factories (including T&C) damaged or destroyed and with production capacity reduced to an estimated quarter of the pre-war level.
In late 1990, when Lebanon began to emerge from the civil war, the impact of the Gulf crisis, which broke out in summer of that year, produced another setback for Lebanese industrial exports. Before the crisis, the Gulf had alone accounted for about half the total merchandise exports of Lebanon, including much of T&C sales, with the major markets then being Saudi Arabia and Kuwait. The civil war and the Gulf crisis had the effect of exposing the weakness of Lebanese business practices based on mere ‘selling’ of products to quasi-captive Arab markets, rather than marketing on the basis of quality, product differentiation and competitiveness. Can the Lebanese get out of this mentality and genuinely compete? The example of Jordan is not encouraging. Faced with competition from Egypt, QIZ exports have gone down in the past couple of years. Confronted with a different set of problems, both countries’ T&C sectors have to compete to survive, a message that is only slowly getting through to them.
Riad al Khouri is co-founder and principal of KryosAdvisors and senior fellow at the William Davidson Institute at the University of Michigan, Ann Arbor.
