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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.

 

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