Before Tunisia’s revolution, it was neither an economic miracle nor a complete bust. To be sure, the Tunisian economy was not a full success story, but it was doing better than other countries in the region. Tunisia achieved an average economic growth rate of nearly 5 percent during the last decade, outpacing other countries in the Middle East and North Africa. Tunisia, however, was a complex case with a delicate authoritarian bargain between the regime and society. For a long time, the regime was able to provide economic and social gains to large segments of the population and secure its legitimacy and political stability in return.
But the authoritarian bargain failed with the growing inability of the economy to create jobs for educated labor, the proliferation of unprotected and poorly paid jobs in the informal sector, and rising income inequality and regional disparities. Gradually, the losers from the status-quo began to outnumber the winners—this eroded the regime’s legitimacy.
As Tunisia moves away from its former regime, policy makers need to seize the historical opportunity to review the foundations of the country’s economic strategy and overcome its key challenges.
Striking a delicate balance between efficiency and social justice in economic policy and between a favorable investment climate and transparent incentive schemes will no doubt be tricky. The elected government should come up with a consistent package of policies that relies on credible discourse, concrete goals, and a time table to achieve them.
A sustainable process of job creation needs a strong and competitive private sector. In high-growth countries, private investment typically exceeds 25 percent of GDP. But investment struggles to reach 15 percent in Tunisia. The state still controls a great deal of the economy and also permeates the private sector through a complex web of cross-ownership. And the state is present not only in network industries—such as telecommunications, energy, transport, and banking—but also in other sectors such as fertilizers, mining, construction materials, and so forth.
Policy makers need to pinpoint the factors that impede private domestic and foreign investment and implement reforms in four key areas.
First, Tunisia needs to review investment restrictions in services sectors, with the goal of increasing the participation of private domestic and foreign investors. Entry into many services, such as trading activities (wholesale distribution and retail trading), are reserved for enterprises with Tunisians holding majority interests. For several other services activities, foreign investment requires prior agreement from Tunisia’s Investment Commission if foreign ownership exceeds 50 percent. The inner-circle of Ben Ali’s regime used these provisions to make themselves inescapable partners for foreign operators and it clearly deterred private investment.
Second, the weakness of the Tunisian financial system is another handicap to growth because it raises the cost of capital and leads to inefficient resource allocation. The government maintains firm control over the three largest public banks and the banking sector continues to suffer from limited competition and excessive levels of non-performing loans.
Third, authorities need to review incentives provided under the investment code and design more effective, consistent, and transparent set of supportive measures for investment and exports. Every year, the government gives up between 50 and 60 percent of the corporate taxes that are owed in the form of tax incentives. Yet, these incentives have been ineffective in promoting private investment and creating jobs. Ben Ali’s regime primarily used the system of incentives to buttress its legitimacy and strengthen its political and administrative control over the private sector.
Fourth, dealing a blow to the culture of corruption is essential to both the social and economic future of Tunisia. But corruption is a systemic issue that may not have fled Tunisia with Ben Ali. Fighting corruption will entail cracking down on bribes, tax fraud and evasion, and the allocation of social services for political purposes.
Although the media and public opinion focused exclusively on high-profile corruption among members of Ben Ali’s family who were abusing their positions to illegally accumulate wealth, the issue of corruption and nepotism in Tunisia transcends the regime’s inner circle and trickles down to large segments of the society. Clientelism was nurtured under Ben Ali and a solidarity network was created that was not part of the government but was led by the ruling party’s elite. The network, by granting access to favors and social services in exchange of the regime’s support, transformed the culture of patronage into widespread corruption across all segments of society.
Policy makers and other stakeholders need to implement a comprehensive anti-corruption strategy. It needs to target not only those who used to abuse their positions but also private individuals and organizations that used to take advantage of the system. Public awareness campaigns that explain the harmful effects of corruption on economic growth, investment, and competition are necessary but insufficient. Raising awareness needs to come with adequate enforcement to be effective.
Tunisia’s government will not have much room to maneuver and increase public investment in the years ahead with a large part of the budget absorbed by non-discretionary spending in order to keep both public deficit and debt under control. The private sector is therefore essential for Tunisia’s economic health. The elected government must promote private sector development by removing inefficient regulations and fighting corruption. Instead of rents for patronage, the government needs to offer appropriate incentives based on economic efficiency and social justice.