Tunisian Economy Struggles

According to a recent study, Tunisia’s economy is being hampered by a lack of effective institutions that ensure accountability, and by the high financial and regulatory cost of employing workers, Lahcen Achy reports.

Topics covered

millennium challenge corp., infrastructures, economic

May 3, 2013

A recent study conducted by the African Development Bank (AFDB) in association with the Millennium Challenge Corporation has identified two major impediments to economic growth in Tunisia. The first is a lack of effective institutions that ensure public sector accountability, the rule of law, and checks and balances on power. This results in barriers to entry, corruption, nepotism and weak protection of property rights.

While the Jasmine Revolution ended the worst abuses of the former regime, the country still needs a sound framework of economic governance and institutions that provide investors with a clear and transparent set of rules, which will give them assurance that they can reap the fruits of their investments.

These challenges can be addressed by constitutional and administrative reforms along with a clear and consistent approach to the private sector by the transitional government, which should signal that it is committed to private sector-led growth, as well as fair and objective adherence to existing laws.

The second major impediment to economic growth in Tunisia is the high financial and regulatory cost of employing workers. Although social security programs and labor protections are intended to enhance workers’ pay, benefits and economic security, many measures currently in place have caused the opposite and have expanded the informal sector, with firms using a variety of means to evade the requirements of employing workers.

Comparing business practices worldwide shows that Tunisian firms face some of the world’s highest payroll tax burdens and most stringent requirements to dismiss workers. These factors reduce investments and the demand for skilled labor.

The number of businesses in Tunisia employing fewer than six people is large compared to emerging countries, which are witnessing faster growth than Tunisia. Medium and large companies do not find the Tunisian economic environment suitable and attractive.

The above diagnosis identifies the key factors impeding economic growth in Tunisia. Other studies have pointed to other factors, notably the lack of investment in infrastructure, the poor quality of education and the weakness of government aid to the private sector. All these areas need to be improved and developed but if the two major impediments described above are not removed, the additional investments that result from improving the infrastructure and education will not be enough to sustain the economy.

Despite significant regional differences in the infrastructure, road quality, transportation cost and the availability of electricity, those factors are not impeding economic growth at the national level. The present infrastructure of telecommunications, airports and seaports is sufficient. But targeted investments in infrastructure, such as increasing the capacity and efficiency of the ports, will boost growth by increasing international trade. Moreover, transportation infrastructure, which connects the interior to coastal urban centers may help the economy but only after the two major impediments are removed.

Compared to many countries in the region, Tunisia was able to quickly improve access to education. The high unemployment in various disciplines clearly indicates that investment and growth are not being hampered by a shortage of skilled labor. The high emigration rate of educated workers indicates that they can compete and find jobs outside Tunisia. According to opinion polls, companies operating in Tunisia do not consider the need to train workers to be an obstacle to investment. Investing in education and skills, despite its importance, will not raise economic growth given the limited demand for skilled labor.

Although Tunisia offers tax incentives to companies to encourage innovation and competitiveness, that has not stimulated investment or reduced unemployment. Government efforts to support innovation are unlikely to succeed if the two major impediments are not removed first.

There is an urgent need to start a national dialogue among representatives from civil society organization, trade unions, employers, workers in the informal sector and the unemployed to reach a new social contract that accommodates the economic effects of public policy and recognizes the importance of property rights, competition, and fighting corruption in driving growth and creating jobs.

In addition, the laws governing business should provide reasonable protection for workers but sufficient flexibility to dismiss them so that firms can keep adjusting to an unstable economic environment, to open the country to global competition and to absorb external shocks. In consultation with civil society groups, the government should develop practical alternatives to social security systems and it should protect citizens instead of protecting specific jobs.

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