Jordan is the poster child for the Bush administration project of “transforming” the political order in the Middle East through free trade. If Jordan is any guide, however, economic liberalization does not lead inexorably to the diffusion of political power.
A key part of President George W. Bush’s sales pitch for his program of “transforming” the Middle East has to do with trade. “Old patterns of conflict in the Middle East can be broken,” says Bush, “if all concerned will let go of the bitterness, hatred, violence, and get on with the serious work of economic development.”
In Bush’s second term, the appointment of Robert Zoellick, US Trade Representative from 2001–2004, as top deputy to Secretary of State Condoleezza Rice will place trade and economic development policies at the center of US diplomacy in the region. A driving assumption of these policies is that US-initiated free trade and directed assistance to the private sector fosters political decentralization and kick-starts economic development. Bilateral free trade agreements (FTAs), Qualifying Industrial Zones (QIZs) and country-specific assistance programs managed by the US Agency for International Development (USAID) are all pieces of the puzzle comprising the Middle East Free Trade Area (MEFTA) that the administration seeks. The free trade agreement signed with Jordan in 2000 is regarded in Washington as a cornerstone of MEFTA’s eventual edifice.
These mechanisms, while new to US policy in the Middle East, were well-worn instruments of US policy toward the developing world during the Cold War. Then, as now, the bet was that liberalized trade and assistance would foster political change. Economic institutions, in other words, are deployed as political tools. These artifacts of Cold War logic, however, are ill-suited to a supporting role in Bush’s “forward march of freedom” drama in the Arab world. It is the political and social reality of Arab countries that will shape the outcome of these experiments. US trade and development policy has yielded a decidedly mixed bag of economic results in the Arab world. The political effects are clearer — and, if Jordan is any guide, the main effect has been to further concentrate political power.
“Industrialization by Invitation”
Beginning in the 1950s, USAID officials and economists from the Arthur D. Little consulting firm developed the concept of “industrialization by invitation.” The idea was to create geographically isolated areas, termed export processing zones (EPZs), whose lower taxes and fewer protections for labor offered incentives for manufacturers to relocate there. Attracting mobile, “footloose” investment was to encourage immediate increases in local employment, spur the growth of other local businesses and introduce innovative technologies. The initial experiment took place in Puerto Rico and USAID officials subsequently deployed EPZs to a number of Cold War hot spots, including Taiwan, South Korea and the Dominican Republic, in the 1950s and 1960s. Fostering political stability and containing communism through export development seemed to work in East Asia but failed in the Caribbean. [1] Regardless of the varied effects, EPZ policies had the bureaucratic virtue of by-the-numbers implementation and quantifiable indices of success. By the 1980s, officials augmented the zones with direct assistance to the private sector.
Trade and investment promotion organizations (TIPOs) complemented the political component of EPZs. The logic was to create non-governmental associations of private-sector elites as a means to build domestic coalitions dedicated to neo-liberal reform. Beginning in 1993, the Oslo “peace process” presented US officials with an opportunity to extend TIPOs and EPZs to the Middle East. In 1995, US officials created a regional TIPO, the Regional Business Council, in an effort to bring Israeli, Palestinian, Jordanian and Egyptian business elites together. This was followed by the Qualifying Industrial Zone (QIZ) program, whereby designated EPZs located in the West Bank, the Gaza Strip, Jordan, Israel or Egypt could export duty-free to the US market as long as the goods contained specified value added from the participants. In the case of Jordan, this means that no less than 35 percent of the appraised value of an exported good must come from a combination of Jordan (11.7 percent) and Israel (7–8 percent) with the remainder from Jordan, the US, the West Bank, Gaza or Israel. Much like the Cold War rationales, these instruments assumed a causal link between market exchange and peace and stability.
Needless to say, that assumption proved facile and, by the late 1990s, the Regional Business Council had already gone the way the entire peace process went in the fall of 2000. QIZs were another story. While QIZ incentives were not, until recently, taken up in Egypt and occupation and violence in the West Bank and Gaza buried QIZ plans there, Jordan launched its first QIZ in 1998 at the al-Hassan Industrial Estate near Irbid. By 2004, there were seven such zones in operation. Owing to this head start, Jordan has become the poster child for Zoellick’s plans to use trade and private sector assistance to bring sweeping change to the region.
Dueling Trade Agreements
In his time as US Trade Representative, Zoellick was fond of recounting the great history and tradition of trade in the Middle East. “The Spirit of the Levant,” as Zoellick put it, could be reawakened with a nudge from Washington. His overarching goal is to create the Middle East Free Trade Area, a region-wide commitment to increasing trade not only with the US but among Middle Eastern states as well. In this vision, TIPOs and similar direct assistance projects are “one rung” on the ladder to MEFTA, as they will birth a prosperous business class that favors free trade. Trade and Investment Framework Agreements — or TIFAs — provide another step by expanding domestic agendas and discussions for trade to include the business organizations evolving from TIPO funding. QIZs, once packaged as an ingredient in the peace process, have been repackaged as a step toward bilateral free trade agreements with the US. FTAs, which increase the domestic value-added requirement from 11.7 percent under the QIZs to 35 percent, are the final step toward region-wide trade and reform. On paper, successes seem to be piling up. TIFAs are in place in Algeria, Bahrain, Kuwait, the United Arab Emirates and Yemen. In addition to the older US-Israel FTA and the 2000 US-Jordan FTA, similar agreements have been signed with Bahrain and Morocco and negotiations are invasion, diplomats and observers were calling for similar projects for Iraq. Behind this regimented scheme for trade reform lurk a number of critical problems.
In the first place, had Zoellick read his economic history, he would have come across the argument that the Middle East’s dependence on long-distance trade was detrimental to both economic development and political freedom. Longdistance trade is credited with limiting the development of local markets, while the trade revenues accrued to a narrow segment of society, thereby encouraging despotism. [2] A similar problem haunts Zoellick’s regional strategy. How bilateral FTAs crafted to encourage trade only with the US can be “melded” into intra-regional free trade and local market development is left unexplained.
Take Jordan, for example. The original rationale of the QIZs was to encourage trade among Palestinians, Jordan, Israelis and Egyptians. In fact, there is a good argument that Jordan’s QIZs have diverted trade away from the Palestinians. Many of the low-skilled and garment manufacturing jobs that Israeli firms once contracted out to the West Bank and Gaza are now outsourced to the Jordanian QIZs. [3] When the US-Jordan FTA was signed, much of the fanfare was due to the fact that Jordan was the first Arab FTA. But Jordan is no longer alone. In addition to the deal with Morocco, US officials have now, in December 2004, approved three QIZs for Egypt. Jordanian officials have good reason to fear competition from their much larger and lower-wage neighbors in attracting export industries. Indeed, in the summer of 2004, Egyptian trade officials actually traveled to Jordan seeking to induce Jordanian QIZ managers to defect to the Egyptian zones. Intra-FTA and QIZ proliferation suggests not greater regional cooperation and trade but fierce competition in which success is premised upon lower wages. Since the majority of firms that have moved to the Jordanian zones are foreign garment manufacturers, the game seems to be who can offer the cheapest relocation deal. The rationale for cooperating with other FTA and QIZ countries is absent.
The Half Glass Debate
Tied to the regional strategy is a rebirth of the Cold War assumption that trade will induce domestic political change. As the logic goes, free trade cuts through bureaucratic red tape, strengthens property rights and unleashes the private sector to affect greater political and economic decentralization. Again, Jordan is the paragon for nearly every US agency involved in MEFTA or the affiliated assistance programs of the Middle East Partnership Initiative. According to Zoellick, “Since signing the US-Jordan FTA in 2000, Jordan’s sales to US customers have expanded nearly 13-fold.” [4] Growth of the gross domestic product has averaged 4 percent annually, the QIZs have created jobs, Jordan remains generally quiet despite violence on two borders and King Abdallah II is genuinely popular at the White House. In the Arab world, only Tunisia grew more than 4 percent in the 1990s. From the vantage point of a Washington trade bureaucrat, what’s not to like? In fact, when one can get US officials to talk about shortcomings in the Jordanian experience, the story goes like this: King Abdallah is doing all the right things and fighting the good fight, but the fossils in the old state sector are holding him back. If one assumes that the king and the state sector are not necessarily in opposition, however, then there is much to debate.
Over the last decade, Jordan has witnessed the evolution of a core of independent economists and policy analysts. While state officials have curbed public debate about most political issues, economic policy debate remains, and these analysts constitute a critical voice. On the other side, so to speak, an array of USAID-funded business associations and the royal court’s economic advisers, as well as prominent government ministers and their advisers, have come to comprise a pro-trade reform constituency. The evolving debate about QIZs specifically and trade reform more generally provides a window into the domestic Jordanian stakes of the Zoellick vision. The point of departure is how to measure the costs and benefits from the QIZs.
In addition to the growth figures, government advocates frequently cite QIZ employment numbers ranging from 25,000 to 30,000 jobs, the significant jump in Jordan’s exports to the US (approaching $1 billion for 2004) and new worker training programs. Advocates are also quick to emphasize less tangible benefits from QIZs and trade reform. A large proportion of QIZ workers are young, rural women, for whom the QIZ factory work is often a first job. Advocates also advertise the QIZs as engines for local development. One of the more successful privately managed QIZs is al-Dulayl Industrial Park, launched in 2000 and located in a rural area 28 miles northeast of Amman. Since its creation, the growth in QIZ production there has triggered modest growth in support industries and services to the factory workers. Though there is no systematic data, villages in the surrounding area seem to have grown as workers have moved back. The advocacy position, in short, reduces to an argument that the glass is half full — Jordan has more jobs and exports more to the US market.
Critics respond with different numbers and a different glass. There is much to question in the rosy statistics cited by the government, they say. Jordan’s economic ministries are no strangers to the political necessity of providing encouraging numbers to the International Monetary Fund and World Bank. How about Jordan’s clearly impressive GDP growth figures, then? Growth is not necessarily development and the reasons for the growth are hardly attributable to trade and economic reform. Jordan, and Amman specifically, have clearly benefited from capital flight from the West Bank as well as Iraq. For older businessmen, the scene recalls the 1970s, when the country underwent a similar artificial boom fueled by the Lebanese civil war and oil money from the Gulf, eventually leading to crisis in the 1980s. Like then, today much of the growth is generated by short-term investments in real estate and services located in West Amman and purchases from the fast-bulging pockets of the capital’s upper class. For the poor and working class located in East Amman, prices have gone up while incomes have stagnated. Moreover, Jordan has become one of the world’s most dependent nations on foreign aid. The draft budget for 2005 estimates that foreign aid and oil grants from the Gulf states will equal 15 percent of the GDP, an astounding figure for a country that is suppose to be a regional example of productive development. Critics point out that the numbers are often used as a bait and switch, depending on the political necessities.
For instance, the QIZ program has gone from being spun as a key element in deepening peace to being portrayed as an engine of economic development. Now, the QIZs are downplayed and the free trade agreement is the hero. Take Zoellick’s refrain that “since signing the US-Jordan FTA in 2000, Jordan’s sales to US customers have expanded nearly 13-fold.” The inference is that the FTA is responsible for this growth, when in fact only a very small percentage of Jordanian exports to the US fall under the FTA. Interviews with QIZ manufacturers reveal that meeting the 11.7 percent domestic requirement under the QIZ is much easier than the 35 percent under the FTA, especially for foreign firms that import all of the fabric and machinery. Jordan’s exports to the US are indeed impressive, but figures from the Jordan Investment Board show that 88 percent of the capital invested in the QIZs is classified as non-Arab, while only three of the 51 registered QIZ factories in 2004 are Jordanian-owned and operated. Indeed, the QIZ managers compete exclusively to lure foreign garment manufacturers. Similar criticism plagues the employment issue. At a July 2004 conference on trade reform hosted by the Jordan Center for Public Policy Research and Dialogue, there were no less than three different government estimates of QIZ employment. Assuming 30,000 QIZ jobs, the number of foreign workers still exceeds 40 percent in most analyses. The usual excuse is high turnover among Jordanian workers versus the reliability and skill of South Asian workers. Thus, Jordanian women may be working in the QIZs, but they are not staying long and very rarely learning new skills on the job.
A final claim made for QIZs relates to what are called “backward linkages” — meaning that QIZ factories are drawing materials as well as labor from the local economy and helping business outside the zones to prosper. Thus, the 11.7 percent that comes from Jordan needs to involve ever higher value from the local economy. So what is going into the zones from the Jordanian economy? While the QIZ and FTA agreements list potential domestic inputs that count toward the required percentages, what is actually coming from the local economy is unknown. The stakes are quite high. If the bulk of QIZ inputs from the local economy remain simply wages, utilities, depreciation of machinery, and the cutting and sewing of imported fabric, then the QIZs will remain enclaves with little benefit for the wider economy. As of 2004, Jordanian government officials acknowledged that such information is gathered (and indeed is required by the QIZ and FTA agreements), but they were unwilling to release the data. US officials refuse to release the same data collected by the Commerce Department, citing the proprietary interest of the individual firms.
For critics, this is an admission that actual Jordanian input is what one would expect with “footloose” garment manufacturing: cheap, not given to upgrades and yielding benefits primarily for the foreign producers and domestic zone managers. Consequently, critics conceive of a half empty glass. They seek a new one that is filled by more than higher exports and low-skilled jobs.
No Fools, Those Elites
Tough questions about the US effort to reform economies through trade alone are warranted. Mainstream policy analysts, and likely a good number of foreign service professionals, have acknowledged the above problems. [5] So why are the programs attracting greater funding and inspiring loftier rhetoric? In short, the answer is politics. Political elites in the region are no fools in the game of external aid and managed trade. A great deal of intra-Arab trade, particularly Jordan’s, was defined by managed trade agreements. These agreements were eminently political in that external trade and domestic patronage went hand in hand. These elites understood that economic arrangements and institutions are indeed political tools — only the goal is not to decentralize power but to keep it. The same logic is apparently at work today.
Contra the Zoellick assumption, free traders do not alter domestic political and social institutions to exploit opportunities; rather, they exploit what is already resident. In the case of Jordan and much of the Arab world, what is on hand to be exploited is cheap labor, cheap land and patron-client links to political authority. There is little systematic evidence that export trade reform has lowered barriers to market entry and mounting evidence that trade liberalization actually gives regimes more money to dole out to clients. Gaining permission to open a QIZ requires permission from several levels of the Jordanian government, as well as permission from Tel Aviv and Washington. Not surprisingly, business elites close to the monarchy and government officials have opened the first zones and have been the most successful. These same elites sit on state policy boards established and appointed by King Abdallah. What US officials seem to ignore is that the monarchy and the “old state sector” are not in opposition; they feed off each other. In the same years these trade arrangements were implemented, government officials in Jordan rolled back political, associative, and press rights in the Kingdom. Government crackdowns have intimidated professional and civil associations to end vocal opposition to the monarchy — especially as regards its relations with the US and Israel. US aid and trade policies have yielded new patronage resources so the regime can buy off new elites, further centralizing political and economic control. One is left with the conclusion that US trade and aid policy, far from encouraging political change, is actually helping regimes to stymie progress. Is it possible US officials have missed this?
In one of his last speeches as US ambassador to Jordan, Edward Gnehm offered an almost quaint criticism of the politics involved: “We also continue to press for full transparency in the awarding of government contracts. Influence peddling has a long history in this region and, indeed, no country is immune to it.” Pressing for transparency is laudable, but giving the regime more resources — and more influence — to peddle seems an odd way to go about it.
Endnotes
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[1] Andrew Schrank, “Foreign Investors, ‘Flying Geese’ and the Limits of Export-Led Industrialization in the Dominican Republic,” Theory and Society 32/4 (August 2003).
[2] Samir Amin, The Arab Nation: Nationalism and Class Struggle (London: Zed Press, 978).
[3] Marwan A. Kardoosh and Riad al-Khouri, Qualifying Industrial Zones and Sustainable Development in Jordan (Amman: Jordan Center for Public Policy Research and Dialogue, September 2004), p. 22.
[4] Speech to the World Economic Forum, Dead Sea, Jordan, June 23, 2003.
[5] Steven Cook, “The Right Way to Promote Arab Reform,” Foreign Affairs (March-April 2005) and Thomas Carothers and Marina Ottaway, Uncharted Journey: Promoting Democracy in the Middle East (Washington, DC: Carnegie Endowment for International Peace, 2004).
