67734 February 2012 – Number 57 ARE JORDAN AND TUNISIA’S EXPORTS BECOMING MORE TECHNOLOGICALLY SOPHISTICATED? AND WHY IT MATTERS Ndiame Diop and Sofiane Ghali 1 grow the slowest and technology-intensive products the fastest (Lall 2000). To the extent that Introduction: The last decade has witnessed two technology-intensive sectors are more productive, a interesting features in international trade. First, movement of resources into these sectors enhances high-tech products have become the fastest growing productivity and competitiveness. segment of international trade. Second, developing countries are increasingly becoming exporters of The objective of this paper is to pinpoint the high-tech products thanks to greater trade changes in Jordan and Tunisia’s production and openness, greater ability to master and use export structures over the last decade or so. We use technologies, and a rise in Foreign Direct two highly disaggregated panel export database Investments (WTO 2009). With the globalization of (products captured at the 11-digit level) and a production processes and the important “product-based� methodology that allows a investments in science and technology in rich mapping of products classified by technological countries, knowledge and technology spillovers content and their sector of origin. The database have dramatically increased the opportunities for used runs from 2003 to 2010 for Jordan and from developing countries to specialize in niches within 1995 to 2009 for Tunisia, providing a pseudo-panel high-tech sectors. This is particularly true for structure. countries geographically close to the global sources of innovation, are open to trade and investments, Why Jordan and Tunisia? The choice of Jordan and and have a good human capital base (Keller 2004, Tunisia is, by no means, an accident. First, these Klenow and Rodriguez-Clare 2005 and Howitt countries are among the few countries of the region 2000). well integrated to the global manufacturing markets. FDI stood at 11 percent of GDP in Jordan But why should developing countries improve the and 4 percent of GDP in Tunisia, and exports/ GDP quality of products exported? There is evidence that stood at 49 percent in both countries in 2010. what you export matters for growth, employment, Second, Jordan and Tunisia have a strong human and the magnitude of spillover effects to the rest of capital base, a large number of engineers, a the economy2. Low technology products tend to substantial high-skill diaspora and an IT-savvy young generation attuned to innovation. Both 1 Ndiame Diop, World Bank and Sofiane Ghali, University of countries also struggle with a very high level of Tunis. This Quick Note is based on the authors’ paper: “Are unemployment for the educated and skilled. The Jordan and Tunisia’s Exports Become More Technologically unemployment rate for university graduates is Sophisticated: Analysis Using Highly Disaggregated Export around 20 percent in Jordan and 30 percent in Databases, forthcoming in MENA Working Paper Series N.54. The Quick Note was cleared by Manuela Ferro, Sector Director, Tunisia and the unemployment rate is inversely Poverty Reduction & Economic Management Department proportional to the level of education. Thus (MNSPR), The Middle East and North Africa Region, The World expanding the skill and technology-intensive Bank. . sectors is likely to enlarge the scope for reducing 2 See for instance, Haussman, Hwang and Rodrik (2007) unemployment of the educated youth. At the same exports of textile products. The share of textiles and time, expansion of these sectors is likely to boost clothing in exports rose from 18 percent in 1980 to 44 productivity and growth in a virtuous cycle. percent in 1995, before dropping gradually to 33 percent in 2006 and 24 percent in 2009. The rise and Historical Evolution: Interestingly, the current relative decline of textiles and clothing illustrates export structure of Jordan and Tunisia reflects a two successive structural transformations in contrasting evolution over the last decade or so, Tunisia’s manufacturing sector since the 1970s: (i) a with Tunisia slowly but steadily moving up the period of rapid diversification away from fuel technological ladder from a very low basis, while exports which dropped from 52 percent in 1980 to 13 Jordan saw a steep rise in low-tech exports overtime. percent in 2006 and; (ii) a gradual diversification In Tunisia, since 2004, excluding the global crisis away from low value added textiles and clothing year 2009, the share of medium and high tech towards light mechanical and electrical exports has increased steadily while exports of low- manufacturing which now dominates exports. tech products have declined significantly as a percentage of total exports -from 56.7 percent in The second structural transformation warrants some 1995 to 38.3 percent in 2009. This decline gave way elaboration since it is one of the main drivers of the to a slow rise in the export of products classified as rise in medium tech exports observed over the last medium-low tech (from 6.1 to 11.2 percent of total decade or so. Indeed, in the mid-1990s, Tunisia exports), medium-high (17.4 to 30 percent) and high- abandoned its ambition to build “made in Tunisia� tech (1.8 to 6.5 percent). In Jordan, the share of low cars and focused on automobile parts and and medium-low tech exports increased components, in which the country has developed dramatically since 2003, overshadowing the relative real expertise over the years. The “local content� resistance of high and medium-tech in the entire partnerships built with EU automakers rapidly led period. The share of low-tech exports almost to increased participation to EU automobile doubled between 2003 and 2006 when it reached its production networks (France, Italy and Germany peak (43 percent) while medium-low tech export mainly) and a double digit growth in exports of share increased steadily from 5 to 17 percent engineering and electrical machineries since 1997. between 2003 and 2010. As of 2010, this category has overtaken textiles and clothing as Tunisia’s largest export sector, Drilling down, it appears that the contracting accounting for 30 percent of total exports (against 9 evolution of Jordan and Tunisia’s export structure is percent in 1995). Products in this broad category also the result of the dynamics of a few products. For classified as “machinery and transport� include: example, the rise of low-tech exports in Jordan and electrical wiring systems, electrical motors and the decline of that category in Tunisia are driven by generators, wheels and rubber tires, plastic auto textiles and textile products, which dominate low- components as well as various mechanical auto tech exports in both countries. In Tunisia, the share parts. The electrical wiring system is by far the of textiles and textiles products in total exports largest and most dynamic sub-sector. Tunisia is now dropped by almost half, from 44 to 24 percent among Europe’s top 10 suppliers of electrical wiring whereas Jordan saw a steady increase in the share of systems and the country’s global market share in this product category, from 10 to 18 percent between this segment is about 2.2 percent (World Bank 2008). 2003 and 2010. Jordan’s Evolution: The rise of textiles and clothing The Tunisian Experience: In Tunisia, textiles and in Jordan was also driven by privileges granted to textile products became the largest export sector exporters and greater market access. The Qualifying following the creation of an “offshore� investment Industrial Zone agreement signed with the US gave regime in 1971 and the subsequent participation to Jordanian exports quota-free and duty-free access to EU textile production networks. Tunisia’s offshore the U.S. market under advantageous rules of origin. regime features generous investment incentives Thanks to these incentives, investments in the sector granted to exporters—duty-free tariffs on imported skyrocketed and Jordan’s apparel and textile exports raw materials and equipments, freedom of rose dramatically from US$50 million per year investment, tax holiday, etc. It has triggered before 1999 to US$1 billion in 2010. As everywhere significant growth in FDI from EU companies and in around the world, the textile and clothing industry February 2012 · Number 57· 2 is a significant and cost-effective source of low-skill alliances and licensing agreements with leading employment, as it is labor-intensive and does not international drug companies. require heavy investment in assets. In contrast with Tunisia however, most of the 60,000 workers in this In contrast with Jordan where high tech exports are sector in Jordan are foreigners.3 Although the concentrated, in Tunisia, a large number of products sector’s competitiveness has diminished following contribute modestly to the rise in high-tech exports: the abolition of quotas on China and other large electronics, in particular radio, TV and telecom exporters within the framework of the Multi-Fiber equipments (2.5 percent of total exports), office Agreement, it remains an important sector for the accounting and computing machineries (1.9 percent) economy. A key objective for both Tunisia and and medical, precision and optical equipments (1.7 Jordan is to move up the value chain in textiles and percent) are all contributors to the slow rise in high exit gradually the lower end of this sector where tech exports. There is no apparent pro-active competition with lower cost producers is stiff. strategy behind the evolution of these sectors. Their emergence relates to the exploitation of existing Current Structure of High Tech Exports: In Jordan, advantages: availability of skilled and semi-skilled high tech exports are driven almost exclusively (98.6 labor, proximity to the EU and the “natural� percent) by pharmaceutical products. Jordan’s development of productive capabilities and inflows pharmaceutical sector features high value-addition of FDI. for the economy, with strong links to local input markets (packaging, material capsules, technology, Policy discussion: Four observations come out of research, etc.) and an ability to add real or perceived the analysis in the paper. First, success stories in value to the products through branding. High embracing globalization and moving up the quality products are exported to more than 60 technological ladder exist in MENA, as Jordan’s markets worldwide, which attests to their pharmaceutical industry or Tunisia’s emerging competitiveness, particularly with regard to brand electronics sector illustrate. Second, “smart� generic drugs (Jordan Vision 2020). The industrial policy seems to play a role in some cases, development of the sector was fuelled by specific such as Tunisia’s decision to abandon making cars strategies implemented by individual companies, and focusing on parts and components in which include: (i) US Food and Drug partnership with European automakers in the mid- Administration’s certification; (ii) research on 1990s. At the same time, success stories identified in product manufacture for drugs which are nearing both countries are all associated with the their patent expiration exploiting loopholes in the establishment of an “enclave� where transparent Free Trade Agreements signed with the US and the “rules of the game� are credibly enforced with the EU in the early 2000s. These agreements provide help of an external policy anchor either through Jordanian pharmaceutical companies with first international agreements (e.g. Jordan’s free trade mover advantage in marketing generic drugs agreement with the US and signature of and compared to international (European and American) compliance with WTO’s Intellectual Property pharmaceutical companies;4 (iii) signature of the Rights) or the establishment of a “special Intellectual Property Rights (IPR) and WTO zone/regime� such as Tunisia’s “offshore� regime agreements which increased the confidence of and Jordan’s Qualifying Industrial Zone. Finally, multinational drug companies in Jordan and when predictable rules of the game exist and are resulted in the establishment of several strategic credibly enforced, success stories feature an absence of government intrusive “intervention� in all cases. It is noteworthy that the “external anchor policy device� is an important tactic for addressing 3 In Tunisia, the sector employs about 240,000 workers, all institutional weaknesses around the world as Tunisians. 4 European Union legislation prohibits European companies from discussed by Noland and Polack (2007). undertaking generic product preparation (R&D) prior to patent expiry. Jordanian companies are unaffected by this legislation These observations point to the importance of trade and have exploited this loophole to develop first mover tools and a predictable business environment as advantage in the generic market for drugs which have recently come off patent. The US has removed such a loophole. The EU important ingredients for industrial success in may close this loophole in its FTA with Jordan as well. Jordan and Tunisia. In particular, the institutional February 2012 · Number 57· 3 framework for business conduct seems to be a key should focus keep counting on a large number of determinant of private investment, whether from sectors/ products to accelerate its movement up the foreign or domestic entrepreneurs. This is consistent technological ladder developing or on a few strong with the main finding of the World Bank regional sectors where the country has demonstrated real study “from Privileges to Competition� published in capacity in recent years. Another question is 20105. The main policy implication from the findings whether Tunisia can boost growth in its emerging of the paper (as for the Bank report) is that Jordan high-tech sectors (electronics, office accounting and and Tunisia need first and foremost a reform of the computing machineries and medical, precision and way the state interacts and interface with the private optical equipments) without deliberately creating sector. This institutional reform is also a pre- new advantages (specialized skills, specific requisite for any effective industrial policy support technological/innovation capabilities and specific that these countries may envisage going forward. inputs such as new legislation, accreditation or The current Arab Spring context provides for a industry-specific infrastructures) and/or attracting unique opportunity to undertake this reform and specific international firms/champions. In any case, send the signal the change is real. Indeed, countries the existence of market failures with access to credit, at the frontier of innovation typically enjoy a stable, skilled labor and specific knowledge provide a trust-based societal environment. The institutional rationale for specific policy interventions, beyond reform entails deep political and public broader reform efforts to improve the business administration reform to upgrade public services environment and providing generic infrastructure. standards in Jordan and Tunisia. Greater accountability of policymakers and control of corruption (institutional reform) will however be Policy Options for Jordan: Given the patterns of necessary to avoid the usual pitfalls associated with changes in export structures analyzed above simply government intervention. improving the rules of the game does not seem sufficient to accelerate structural change. In the case Conclusion: Finally, improving the environment for of Jordan, a key question is whether the country innovation may facilitate the movement up the should base its movement up the technological technological ladder in both Jordan and Tunisia. As ladder solely on one sector: pharmaceutical. found by Jean Francois Rischard et al, in a World Therefore the question arises as to how Jordan can Bank informal study, innovation policy in both replicate the success in this sector elsewhere, given countries is (i) too narrowly cast, addressing mostly its capabilities and endowment6. Another question is technological innovation and largely missing out on whether it is advantageous for Jordan to spend today’s important non-technological sources of much public resources to support the textiles and innovation; (ii) suffers from an institutional clothing sector, when the latter employs spaghetti bowl problem with too many predominantly foreign labor, displays poor working organizations with confusing/overlapping standards, uses scarce water and energy and is mandates and (iii) not aligned to the country’s subject to eroding preference in the US as the latter industrial strategy and resource endowment. is more open to China and other large suppliers Resources to support innovation are spread across since the removal of the Multi-fiber agreement. too thin and key priority areas lack adequate While the response to these questions is beyond the resources to undertake their duties. Addressing scope of this paper, they are worth considering as these shortcomings can be crucial in supporting Jordan devises a new industrial strategy. structural changes in Jordan and Tunisia. Policy Options for Tunisia: For Tunisia, a key Contact MNA K&L: Laura Tuck, Director, Strategy and Operations. industrial strategy question is whether the country MENA Region, The World Bank Regional Quick Notes Team: Omer Karasapan, , Roby Fields, and Hafed Al-Ghwell 5 Tel #: (202) 473 8177 Type title into search function as Worldbank.org 6 The MNA Quick Notes are intended to summarize lessons learned Jordan is a services-dominated economy and its current strategy from MNA and other Bank Knowledge and Learning activities. may be sensible. However, to the extent that sectors such as The Notes do not necessarily reflect the views of the World Bank, consumer appliances (in particular Air Conditioning) have shown its board or its member countries. real strengths in recent years, it may be worth keeping in mind. February 2012 · Number 57· 4