US embassy cable - 04AMMAN9312

C O N F I D E N T I A L SECTION 01 OF 05 AMMAN 009312 
 
SIPDIS 
 
E.O. 12958: DECL: 11/21/2014 
TAGS: ECON, EFIN, ETRD, EAID, KPRV, KMPI, JO 
SUBJECT: JORDAN'S ECONOMIC REFORMS AFTER FIVE YEARS: 
BOOSTING TRADE AND INVESTMENT (PART II) 
 
REF: A. AMMAN 05784 
     B. AMMAN 09311 
 
Classified By: CHARGE D'AFFAIRES, A.I., DAVID HALE, 
REASON: 1.4 (B & D) 
 
1.  (U)  SUMMARY:  Over the past five years, the government 
of Jordan has moved boldly to open up its economy to foreign 
trade and investment.  Jordan has become a member of the 
World Trade Organization, negotiated a Free Trade Agreement 
with the United States, initialed an Association Agreement 
with the European Union, and entered into the Agadir Accord, 
a regional trade association with Tunisia, Morocco, and 
Egypt.   Meanwhile, Jordan's earlier trilateral agreement 
with Israel and the U.S. on garment manufacturing  has at 
last produced an export boom, with Jordan's exports to the 
U.S. jumping from a negligible level five years ago (2% of 
Jordan's total exports) to a projected $900 million in 2004 
(over 30% of total exports). 
 
2.  (U)  SUMMARY (cont.):  Jordan's leadership realizes that 
opening to trade is only one part of the equation of 
globalization.  The government also has launched a strong 
push toward privatization.  It has sold majority shares in 
companies involved in cement, potash and in Jordan Telecom, 
the current sole fixed-line operator.  Plans are moving 
forward to privatize electricity generation and the flag 
carrier, Royal Jordanian.  The government is improving its 
investment climate by strengthening its intellectual property 
protections, and laying the groundwork for vibrant high-tech 
sectors including pharmaceuticals and information and 
communication technology, the latter already attracting 
world-class foreign partners like Microsoft and Cisco. 
Jordan still faces difficult challenges, including 
unemployment, poverty, debt, and high energy prices. 
Nevertheless, with its limited resources, the government is 
currently doing many things right, with substantial help and 
guidance from the USG.  This is the second of two cables 
examining the past five years of economic reform in Jordan. 
END SUMMARY. 
 
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THE JOY OF TRADE 
---------------- 
 
3.  (U)  After a severe financial crisis in 1989 which led to 
a devaluation of the Jordanian dinar, Jordan's economy 
largely stagnated in the 1990s, with high unemployment and 
declining living standards.  It was in this weak economic 
environment, in 1999, that King Abdullah succeeded his father 
to the throne.  Abdullah moved rapidly to open up Jordan's 
economy to the world and Jordan joined the World Trade 
Organization (2000), signed a Free Trade Agreement with the 
U.S. (2000, entering into force in December 2001), signed an 
EU Association Agreement (entered into force in 2002), set up 
the Agadir regional trade association with Tunisia, Morocco, 
and Egypt (agreement signed in 2004), and signed a Bilateral 
Investment Treaty with the U.S. (2003). 
 
4.  (U)  Entering into these agreements, combined with the 
arrangement to manufacture garments with 8% Israeli content 
for tariff- and quota-free export to the U.S. market, had an 
almost immediate impact. Jordan's exports to the U.S., which 
stood at $13 million in 1999, soared to $650 million in 2003 
and should surpass $900 million in 2004.  Two-way trade 
between the U.S. and Jordan will easily surpass $1 billion 
this year for the second year running. 
 
5.  (U)  The Jordanian garment sector, whose launch predated 
Abdullah's accession, has surged under his reign.  Operating 
in U.S.-Israeli-GOJ designated areas known as Qualifying 
Industrial Zones or QIZs, last year the garment sector alone 
produced $550 million in Jordanian exports to the U.S.  The 
sector employs over 23,000 Jordanians, many of whom are women 
from rural areas who have never before enjoyed paid 
employment.  Not only do their new incomes boost the 
economies of their home areas, but their incomes also enhance 
their status in their families and villages and introduce the 
concepts of business systems and the cultures of work deeper 
into the Jordanian society and economy. 
 
6.  (U)  The growth in QIZ exports may slow with the 
expiration of the Multi-fibre Arrangement on January 1, 2005. 
 However, Jordan should be well-placed to shift some of this 
business to the U.S.-Jordan FTA, which calls for the gradual 
phasing out of import duties over the next ten years, leading 
to the establishment of a free trade area, applicable to both 
goods and services.  Currently, 83% of tariffs have been 
eliminated in all major product categories, a percentage 
which should increase to 95% by January 2005 (although a 
number of the garment categories produced by QIZs do not zero 
out until 2010.). 
 
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TRADE AND INVESTMENT SOFTWARE 
----------------------------- 
 
7.  (U)  Jordan's government has also made excellent progress 
in what could be termed trade and investment software.  Since 
its WTO accession, Jordan has made additional commitments in 
intellectual property protections including in copyrights and 
patents and trademarks.  Jordan's Food and Drug 
Administration has launched a cooperative effort with the 
U.S. FDA to build capacity and enhance Jordan's status as a 
center for medical tourism and for pharmaceutical 
manufacturing. 
 
8.  (U)  Even before acceding to the WTO, Jordan passed 
several new laws to improve protection of intellectual 
property rights, patents, copyrights and trademarks.  TRIPS 
(Trade Related Aspects of Intellectual Property 
Rights)-consistent laws now protect trade secrets, plant 
varieties and semiconductor chip designs.  The government 
continues to enhance the country's IPR regime, promising 
additional commitments in patents and trademarks by the end 
of the year.  Although IPR enforcement needs improvements, 
the government has clearly realized how IPR protections 
promote trade and investment. 
 
9.  (U)  According to a recent World Bank/International 
Finance Corporation study, Jordan made the most progress of 
any Middle Eastern country toward improving its investment 
climate in 2003.  Yet the government does not wish to rest on 
its laurels.  As the new Trade and Industry Minister, Ahmad 
Hindawi, recently stated, the government plans to move ahead 
as well in launching its proposed Jordan Authority for 
Enterprise Development, which is intended to make Jordanian 
industrial sectors more competitive globally.  Hindawi also 
promised to keep steady the pace of legal reforms currently 
under way. 
 
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PRIVATIZATION 
------------- 
 
10.  (C)  Accelerating a trend begun under his father, King 
Abdullah, with USAID assistance, has pushed through 
privatization of a number of key industries in Jordan.  To 
date, the government has realized revenues of JD 703 million 
($984 million) from the sale of its holdings in Jordan 
Telecom, the Jordan Cement Factories, the Arab Potash 
Company, an airport hotel and airport duty-free shops.  Other 
government holdings on track for sale include the Aqaba 
Railways Corporation, Jordan Post, and, if the GOJ can find a 
buyer, Royal Jordanian.  Other possible privatization targets 
include the Jordan Phosphate Mines Company and the 
Agricultural Marketing Company.  Illustrating how far the 
government is willing to go down this path, there are even 
plans to partially privatize the site on the river Jordan 
where John the Baptist is said to have baptized Christ.  The 
plan is to let a concession to package and market water from 
the site.  This proposal is part of a wider plan to put 
tourism sites under private management. 
 
11.  (C)  In a sector in which developing countries are often 
loath to relinquish control, the government is well on track 
to privatizing electricity generation.  The Energy Ministry 
has received initial bids for the sale of a 65% stake in the 
Central Electricity Generating Company in a sale that is 
expected to be completed by year-end.  Once that sale is 
complete, the government intends to sell 100% of the 
Electricity Distribution Company and a 55.4% stake in the 
Irbid District Electricity Company (Irbid is a city located 
in the north of Jordan).  When the current round of 
divestitures is finished, the GOJ plans to retain control of 
only the main high-voltage electricity transmission lines. 
 
-------------------- 
THE INVESTMENT CLIMATE 
---------------------- 
 
12. (U)  Jordan has had difficulty attracting foreign 
investment beyond the mining sector and the 
garment-manufacturing Qualifying Industrial Zones.  Despite 
passage of over 220 laws aimed at enhancing Jordan's 
investment climate, foreign direct investment (FDI) remains 
modest at $2.3 billion.  However, the ratio of FDI to GDP has 
increased from 3.9% in 1989 to 25.9% in 2002.  In what the 
government hopes is a sign of the future, companies such as 
Microsoft and Cisco have recently invested in Jordanian ICT 
firms. 
13.  (U)  Certainly the small size of Jordan's market and the 
political turbulence of the region affect foreign investment 
in Jordan.  Jordan continues to try to enhance its 
attractiveness to investment and in May established a 
one-stop shop for investors bringing together representatives 
from nine government agencies to speed licensing and 
registration for investors.  According to the World Bank, 
Jordan has succeeded in cutting the time to register a new 
business from 98 days to 36 days.  According to Jordan 
Investment Board figures, the total  stock of investment is 
up from JD 261 million ($365 million) in 2003 to JD 365 
million ($511 million) through November 7 of this year, of 
which about 20-25% is foreign. 
 
------------------ 
SUCCESSFUL SECTORS 
------------------ 
 
14.  (U)  Two sectors in particular have benefited from the 
government's attention: pharmaceuticals and information and 
communication technology.  Since 1991, Jordan's 
pharmaceutical exports have quadrupled in value to $202 
million in 2002.  Pharmaceuticals were Jordan's third largest 
export earner in 2002 with sales reaching $275 million. 
While Jordan has had a regional dominance in the sector for 
some time, key ingredients in enhancing that success in new 
markets have included Jordan's accession to the WTO in 2000 
and accession to Trade Related Aspects of Intellectual 
Property Rights (TRIPs).  Jordan continues to move ahead on 
its IPR protections, including in the areas of patents and 
copyrights.  Jordan is also looking to strengthen its 
relationship with the US FDA in order to further strengthen 
its own FDA and the pharmaceutical sector overall. 
 
15.  (U)  The ICT sector has also boomed.  Total exports of 
ICT goods and services are up from $20 million in 1999 to 
$310 million in 2003.  Employment in the sector has grown 
substantially in recent years, with an increase of 10% in 
each of the past two years.  FDI has risen from nil in 1999 
to $80 million in 2003.  King Abdullah has taken a personal 
interest in the sector, hosting two international ICT Forums 
and building strong personal relations with IT CEOs.  The 
push is already showing results as Jordanian software 
companies are bidding on, and winning, contracts around the 
world, including in the U.S. 
 
16.  (U)  The ICT sector is also expected to benefit 
substantially from the end of the Jordan Telecom (JT) fixed 
line monopoly at the end of the year.  This will open up the 
remaining part of the telecoms sector since the mobile phone 
sector has already been opened to competition and there are 
now four providers of mobile or push-to-talk services.  The 
end of the JT monopoly will also cut prices and further open 
the sector for investment.  Ending this monopoly is another 
of the areas in which USAID has played critical role in 
advising Jordan on economic reforms. 
 
-------------- 
THE CHALLENGES 
-------------- 
 
17.  (C)  Despite the predominantly positive developments 
reported in these two cables, Jordan still faces real 
economic difficulties.  Debt levels remain high.  Although 
debt is being cut steadily at the moment, an economic 
downturn could quickly reverse that picture.  Unemployment 
and poverty are high and these levels help contribute to the 
impression that the recent prosperity has yet to trickle down 
to the average Jordanian, particularly to those outside of 
the capital.  Although population growth has slowed to 2.5%, 
that level is still too high and a population bulge of young 
people needing jobs still confronts the labor market.  Scarce 
water resources remain a nearly insurmountable hurdle, with 
Jordan one of the ten most water-poor countries in the world. 
 High oil prices will also continue to strain government 
finances; the government will find it politically challenging 
to meet its goal of eliminating fuel subsidies in three to 
five years. On the trade side, there is great uncertainty 
about the expiration of the Multi-fibre Arrangement at the 
end of this year and its effect on the exports of the 
Qualifying Industrial Zones. 
 
18.  (C)  Adding to these challenges is the need for the 
government itself to undergo reform.  In the new government 
named last month, the King moved the former Foreign Minister 
to a new position as Deputy Prime Minister and Minister of 
State for Prime Ministry Affairs and Government Performance, 
charged with the task of making government more efficient and 
responsive.  Many Jordanians continue to hold perceptions of 
high-level corruption, although perhaps less intensely than 
last summer, when rumors of shady deals were swirling around 
Amman (reftel A).  Nevertheless, there is still almost no 
transparency in government contracting, and it is widely 
assumed that under-the-table payments and/or 
influence-peddling are a routine part of major deals. 
 
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COMMENT 
------- 
 
19.  (C)  It is important to stress the key role the U.S. has 
played in supporting the progress Jordan has made in its 
economic programs.  In nearly every initiative undertaken by 
the Jordanian government over the past five years, USAID and 
the USG have played an important role.  USAID has provided 
financial support and technical expertise and helped to put 
flesh on the bones of the strategic vision developed by the 
King.  The U.S. assistance program is trusted and our advice 
is acted upon.  The desire of the King to shake Jordan's 
economy out if its lethargy was the sine qua non of the 
country's success to date but USAID lent a critical helping 
hand. 
 
20.  (C)  Despite the considerable challenges the country 
must still face, the economic progress of the past five years 
remains remarkable.  Jordan enjoys a more diverse economy, 
venturing with already demonstrated success into high tech 
sectors.  Debt levels have fallen.  Trade is booming, having 
quickly overcome the country's reliance on the export of 
substandard goods to Iraq.  Official statistics show 
unemployment and poverty levels falling and Amman, at least, 
is enjoying a construction boom.  A large part of the credit 
for the flood of good news goes to King Abdullah.  Not only 
has he communicated a vision of economic integration to the 
people but he has also put in place a series of skilled 
ministers in the key ministries who can implement this 
vision. 
 
21.  ( C ) Jordan still has a long way to go before its 
prosperity is assured.  The King professes a belief in the 
necessity of integrated reform, but has yet to find a way (or 
perhaps the will) to keep political and social liberalization 
moving at the same quick pace as economic reform.  Meanwhile, 
the pillars that have traditionally kept the monarchy in 
power -- the East bank military, tribal, and intelligence 
elites -- are the elements most suspicious of economic 
liberalization and globalization.  Many influential 
supporters of the King retain a statist mentality, and just 
don't understand the King's plans for the country.  Reform's 
future in Jordan probably depends on the King's skill at 
convincing -- or easing aside -- some of his most loyal 
subjects. 
 
22.  (U)  Baghdad minimize considered. 
HALE