Archive for June, 2013


economics of Tunisia

Friday 28 June, 2013

While in Washington DC, I attended this event The Role of Economics in Democratic Transitions: The Case of Tunisia, which featured Mondher Ben Ayed & Larry Diamond @ the Legatum Institute.  While the title highlighted the link between economics & democracy, the focus of Ben Ayed was clearly on economics.  Tunisia’s macroeconomic fundamentals are strong:  5% growth, deficit 3%, 3% inflation, debt/GDP of 40%, 80% literacy & 5% of the population studying @ universities.  Tunisia is 1 of the best states in the region for women, who comprise 62% of all pharmacists.

So then what went wrong?  Mostly, it’s been the fact that Tunisia was run by a dictator with no opposition.  There are also huge disparities between the coast & interior.  800K are unemployed, which means only new employment comes from growth because Tunisia in not rich in natural resources.  The country needs 7-8% growth to absorb new employees.  75K become unemployed each year @ only 5% growth.  Corruption in the former leader’s family was also a problem.

After the revolution, the transition influenced the economy:

  • insecurity rose
  • law enforcement disintegrated as officers fled
  • the army was trusted & held the country together
  • criminals were cut loose & crime rose
  • the population asked for the return of security forces, which returned are now @ just about full capacity

This wreaked havoc a number of ways:

  • violence erupted
  • sit-ins & strikes started social movements
  • this wreaked havoc on investment
  • foreign currency reserves fell

5 governments which all lacked legitimacy held power over the next 1 1/2 years.  The lack of a constitution led to no visibility to investors, so reforms were required.  Corrupt capitalists were tied to the old system-40 were banned from foreign travel.  The result was damaging the role of businessperson as a role model.  Political parties agreed to turn the page.  Unions were strong, in the French tradition, which led to salary increases from 6 to 10B dinars in 2-3 years.  Subsidies increased 4.4B dinars in 2 years.  The budget went up, but costs increasing more than revenues led to a deficit of 6.5%.  The revolution came @ a bad time, as Europe, with which Tunisia has a free-trade-agreement, was slipping into recession.  The Libyan war hurt Tunisia:  an influx of 1M Libyans with 150K cars contributed to inflation when they consumed lots of subsidized gas.  There was less prosperity which was stressful for the government.  Tunisia’s future depends on Libya, despite the arms smuggled from the latter to the former.

Politicians realized they needed to bring stability to attract investment, which requires reform, but that’s painful.  Tunisia could be the 1st successful example of successful democracy in the Arab world, as it holds elections @ the end of the year.  The international community should help fight terrorism by providing financing & foreign direct investment during this transition.

1 0n 1 discussion with Larry Diamond:

  • Tunisia is no longer a sultanistic economy, but political reform requires economic reform too.  An independent judiciary is required for growth & investment.  Good governance fights corruption.  The free market is not in jeopardy as they seek to raise revenues by lowering tax rates, but collecting them from a wider base.
  • The nature of subsidies are changing.  They’re still 40% for fuel, but they are changing from generalized to more specific, to support tourism, for example.
  • It’s hard to create entrepreneurs in Tunisia.  Only 1 in 20 succeed.  They can’t wait for another economic class to develop, but they need entrepreneurship to stimulate the economy.  While it will take years to deal with transitional justice, the economy can’t wait.  Entrepreneurs need to be good role models.  200K unemployed are seeking government jobs because of the negative image of businesspeople.
  • New laws & their enforcement are needed to control corruption into the future, which is now worse than before.

Open Q&A

The interior is not poor:  marble is exported around the world.  Rich agriculture has vast potential, but it hasn’t been developed because of lack of infrastructure & investment.

Protests in Turkey have galvanized secular forces, but otherwise have had little other effects.

Since the 1970’s Tunisia has introduced free markets;

  • the culture already exists
  • the public sector employs 500K while the private sector employs 2.5M
  • privatization has been occurring since the 1990’s
  • people are generally happy with the results
  • Tunis has a  strong business community

The US, France, & Turkey are helping beef up security.  Infrastructure still relies on international financing, i.e. $5B in loans.  The US gave bank guarantees in 2011, but not since then.

Relations with Libya is at the heart of current discussions.  That these countries are complementary is obvious & Tunisia understands Libya’s strategic importance.  A new investment code gives Libyans the same rights as Tunisians.  Economic integration could lead to coordinating economic policy & subsidies, fighting smuggling, & better security & border control.



future of the g20 & IMF?

Monday 24 June, 2013

I checked out this event @ the Woodrow Wilson International Center in Washington DC Savior or Achilles’ Hell of International Markets: the G20, IMF, & the global financial crisis presented by Chris Legg, former executive director the Australia & Pacific constituency @ the IMF.  (We walked in a few minutes late, but don’t think we missed too much).

Chris opened with a brief history of the Bretton Woods agreement & explained how inertia has delayed changes in how IMF quotas have evolved over time, keeping the industrialized world overrepresented while the emerging markets are underrepresented.  The IMF is a rules based system that was designed for a different world to facilitate trade & not capital flows.  It uses soft terms with few obligations to create a stable system of exchange rates & prohibit exchange rate manipulation.  In it’s quest for political leadership, the role of the US is changing while the economic reality is changing as high growth rates lead to increased influence of Asia & China.

On the eve of the financial crisis, there was a misalignment between the voice & representation of the IMF.  The subsequent track record raised the following questions:

  • should there be financial sector reform?  interventions differ
  • should the IMF reform? it would be a grand reform
  • how should surveillance & policy change? it’s rules vs. ownership
  • What about governance reform? it’s been piecemeal
  • Should they be policemen or advisors?
  • Were they asleep @ the wheel which allowed the financial crisis to occur?  imbalances should have been addressed
  • Are stronger rules needed? no
  • Is improved political ownership needed?

Better analysis is needed to break down silos, but better reports is not the same as political ownership.  The G20 Mutual Assessment Process (MAP) provides a framework for growth.  It created a relationship with the fund, as uncomfortable but complementary partners & allows them to leverage technology capital, eliminate sensitivities, & allow emerging market economies (EME’s) to hedge their bets.

2010 brought fund governance reform with a shift in the quota & voting shares which resulted in a shift in power from Europe to the EME’s.  But there has been no progress as an open transparent process has been held hostage to the current share structure.  There is defeatism & division among the EME’s.  Strengthening of the political leadership & ownership has been stymied by the EME’s which are suspicious of the dysfunctional board.  Realignment of the executive board has been demanded but failed to deliver as the EME’s have been frustrated.  There has been a quota realignment with a 5% shift to the EME’s which is yet to be delivered.  It took a 1.35% “haircut” of the shares of industrialized nations as central & south america fell while China & Brazil gained.  There has been a proposal for a quota formula review, which would be a function of GDP, but that has been kicked down the road.  Unfortunately there is no incentive for long-term cooperation.  Although there is pressure on fund resources, even as EME’s assume creditor roles, no new leaders have emerged.

In the post-2009 world:

  • successes have not been implemented
  • reform has met skepticism
  • leadership has been elusive
  • rules have not led to political consensus
  • policy cooperation has made the G20 fragile

The IMF has been in protracted transition, but as the US has been compromised, it is still indispensable.  The future path is not clear, but nothing is inevitable.  Europe has weakened as China challenges.  The BRICS are still a work-in-progress.  The G20 remains essential, but may have too many deliverables as it needs to balance ambition with pragmatism.  It’s values have been tarnished by the crisis, but inertia is the bigger problem.


There is cautious optimism about Greece, although there are no strong messages either.  Not being able to change exchange rates leads to difficulties.

Australians provide pragmatic approaches & workable solutions to compromise as it assumes leadership of the G20 next year.

The EME’s are cautious & conservative, but  there is no waiting for better governance.  They are too simplistic on ownership, while there are still domestic sensitivities which makes it easier for them to accept their consequences.

The IMF provides a dialogue among all of it’s members about exchange rates.  It promotes stability by adjustment, but it’s methodology is easy to debate.  They offer policies that are consistent for long-term growth but need more rigorouts opposition.