Jordan Times
Monday, April 19, 2004
Economic Pulse: Role of exports in economic growth
By Fahed Fanek
The volume of Jordanian commodity exports during 2003 reached JD2,127 million,
forming some 30 per cent of the gross domestic product (GDP). This is a rather
high rate that matches or exceeds the corresponding rates in countries like
China (29.5 per cent), France (27.9 per cent) and Mexico (27.2 per cent). It
amounts to three times the ratio of exports to GDP in highly industrialised
countries such as Japan (10.4 per cent), and the United States of America (10
per cent).
The ratio of exports (and imports) is naturally supposed to be high in small
countries, especially if they are open to the world market as Jordan is.
However, the contribution of Jordanian commodity exports to the economic growth
rate and the gross domestic product is much less than this high percentage
suggests. This is so due to three factors that cannot be ignored.
First, some 23 per cent of our overall exports is actually reexports of imported
goods. The value-added in reexports, in the form of trading profits, could not
be more than 10 per cent at best.
Second, some 20 per cent of Jordanian exports are represented by commodities
originated in the Qualified Industrial Zones (QIZ) destined to the American
market. The Jordanian component in these products could not be larger than 15
per cent; it is a condition that such products should have at least 11.7 per
cent of Jordanian value added, besides a minimum of 8 per cent of Israeli input.
Third, the value-added in the remaining 57 per cent of exports is, on average,
estimated to be to the order of 25 per cent.
Under the above facts, or near facts, only 19.6 per cent of commodity exports,
or JD415 million, can be described as value-added and thus may count as a
contribution to the gross domestic product of the country. Roughly speaking, the
exports share in the gross domestic product in 2003 is 6 per cent only. Not bad,
but not impressive.
If the composition of Jordanian exports remains the same, they have to grow at
the rate if 16.7 per cent to cause the gross domestic product to rise by one
percentage point out of the economic growth target of 5 per cent, set for 2004.
This is not meant to underestimate the economic importance of exports. There is
no doubt in my mind that exports are one of the growth engines. Exporters
deserve encouragement and financial incentives. However, the effort should not
be focused only on the quantitative aspects of exports, they have to tackle
quality and composition as well, meaning they have to raise the rate of added
value through the usage of more domestic production factors and by increasing
dependency on locally produced raw materials and intermediary products made in
Jordan. Interdependent industries arranged as clusters can help in this respect.
Motivating exports through granting exporters income tax exemption is
appropriate, but the exemption should not be in proportion to their exports.
Exports do not deserve exemption except in proportion to the value added as a
percentage of total sales. When a company's imports make 70 per cent of its
production cost, it should be entitled to an exemption of income tax on no more
than 30 per cent of its total export sales. The rest is merely reexport, the
profits of which should be taxed accordingly.
Jordan's economic growth is usually described as export-driven. This may be true
due to exports of services, especially medical, educational, transport and
financial, where the value added is high and Jordan enjoys a competitive edge.