Will Tunisia ever become a 'Mediterranean tiger'?

According to a report by the World Bank, Tunisia's economy has not effectively addressed the issues that plagued it before the 2011 revolution.

al-monitor Tunisian Prime Minister Mehdi Jomaa speaks during the "Invest in Tunisia, Start-up Democracy" conference in Tunis, Sept. 8, 2014. Photo by REUTERS/Zoubeir Souissi.

Topics covered

world bank, tunisian economy, tunisian revolution, tunisian politics, economy, business

Sep 22, 2014

Tunisia is in an economic paradox; it has everything it needs to become the “Tiger of the Mediterranean.” Yet, it struggles to materialize its economic potential. There are several factors that led to the Tunisian economy’s low performance: insufficient job creation, systemic corruption as well as a low export rate and persistent regional disparities. These are all facts that contributed, inter alia, to the outbreak of the 2011 revolution.

On Sept. 17, the World Bank and the Arab Institute of Business Managers (IACE) organized a conference on the latest Development Policy Review (DPR) report titled, “The Unfinished Revolution: Bringing Opportunity, Good Jobs and Greater Wealth to All Tunisians.”

This is the first report that provides a comprehensive analysis of the Tunisian economy since the revolution in 2011. It provides a detailed analysis of the main barriers to growth and job creation and proposes reforms that might accompany or accelerate the structural transformation needed within the Tunisian economy. The event was attended by Hakim Ben Hammouda, the minister of economy and finance; Shantayanan Devarajan, chief economist of the World Bank's Middle East and North Africa region: and Ahmed Bouzguenda, IACE president.

During his speech, Ben Hammouda emphasized the report's importance, since it reviewed different challenges faced by Tunisia and suggested solutions to overcome the crisis and revive the national economy. The minister of economy and finance has also highlighted the dichotomy between the political and economic period after the revolution. Indeed, the report indicates that during the three years following the revolution, Tunisia has made ​​significant progress on the political level, which resulted in a consensus over a new constitution. However, the economic system that existed under ousted former President Zine El Abidine Ben Ali has never really changed, and the demands of Tunisians for access to economic opportunities remained unsatisfied. There are multiples causes and symptoms of the paralysis of the Tunisian economy, as evidenced by the World Bank study.

Tunisia is characterized by a protectionist regulatory framework that significantly reduces competition and private investment, in particular direct foreign investment. More than half of the Tunisian economy is only open to a limited number of companies.

The lack of competition is costing the economy more than $2 billion per year, or about 5% of the country's wealth. A significant number of privileged companies licensed to operate in protected sectors are public companies, which account for 13% of the GDP and 4% of total employment.

These companies often receive financial support from the state (3% of the state budget in 2013). Under these conditions, it's impossible for the most efficient private companies to grow and compete with these public companies. Ben Ali owns 220 private companies which operate in lucrative sectors such as telecommunications, air transport, advertising and many others, and are not open to competition. They achieve more than 21% of all of the profits of the private sector to the detriment of all other sectors. Nearly four years after the revolution, the economic and regulatory policies system that serves as a veil of deception for rent-seeking has remained intact.

Moreover, the management of bureaucratic and regulatory barriers consumes 25% of the time of managers and nearly 13% of the total revenue of companies. Consequently, Tunisian companies are only competitive in labor-intensive services provided by unskilled labor force, such as assembly works, since the wages of unskilled workers in Tunisia are still low compared with other countries.

Tunisian companies mainly import foreign-made ingredients and assemble them in Tunisia for re-export, which translates into fewer jobs, lower wages, and few opportunities for many skilled graduates in the country.

Excessive regulations and the state's tight grip have led to widespread corruption, cronyism, tax and custom evasion, among others.

The cost of corruption is estimated at 2% of the annual GDP in Tunisia. Custom fraud, tax evasion and abuse of government procurement have undermined competition by encouraging the best connected and corrupted companies.

This creates an environment based on privileges and annuities, which prevents competition and efficient sources reallocation between more productive firms, ultimately leading to limited numbers of jobs with lower quality.

Many economic policies are misguided in Tunisia, according to the study. For instance, the Labor Code does not encourage investment in activities requiring intensive workforce; it paradoxically contributes to the exploitation of workers and job insecurity. 

Furthermore, more than 50% of workers are not covered by social security, despite the high cost of payroll taxes. Meanwhile, the financial sector is also not very efficient. The overall level of banks lending to the private sector remains below potential, constituting about 10% of GDP. 

The quality of funded projects is also disappointing, as evidenced by the high rate of projects unable to settle loans used for their start-up and implementation.

The World Bank study highlights the fact that the banking sector is characterized by significant failures in governance, especially the large public banks that are protected against competitors and receive grants, allowing them to finance well-connected entrepreneurs instead of successful projects.

Therefore, well-connected individuals have easy access to credit. Meanwhile, public banks have accumulated losses amounting to 3% of GDP, which is more than $1.5 billion, necessitating a bailout from the public budget.

This is another failure of the investment incentives policy, "which is expensive and does not contribute to either creating jobs or reducing regional disparities." This policy is costly: 2.2% of GDP in 2009. It is mostly a waste, as only 21% of companies could invest without tax benefits. These incentives come to the advantage of exporting companies that are located along the coast, while only 16% of jobs were created in the inland regions of the country.

The dichotomy between "onshore and offshore" is at the heart of the poor performance of the economy: The low efficiency of protected "onshore" sector is adversely affecting competitiveness of "offshore" sectors.

Tunisia is at crossroads and can choose a new model to release its economic potential. Increased competition and reforms in the banking sector would double job creation and yield an increase in domestic private investment. Tunisia could also become a world leader in the export of manufactured and agricultural products, paving the way for a services sector. To achieve this, a new vision and a strong political leadership are essential so as to introduce reform and go beyond the current system.

Continue reading this article by registering at no cost and get unlimited access to:
  • Al-Monitor Archives
  • The Week in Review
  • Exclusive Events
  • Invitation-only Briefings

More from  Ikhlas Latif