All Politics Is Economics
How economic reform can save Tunisia.
Note: This article is an abridged version of the Legatum Institute’s publication, "The Dynamics for Transition in Tunisia."
Despite bad management and poor leadership decisions, the Tunisian economy was not in terrible condition in the years prior to the Arab Spring: It achieved an average annual growth of roughly 4.5 percent; inflation was around 3 percent; the budget deficit was less than 3 percent, the debt to GDP ratio was near 50 percent, and the GDP per capita was around $4,000. With no major natural resources, Tunisia’s wealth consists in its educated and highly qualified workforce. Before 2011, Tunisia seemed — at least on the surface — to be well positioned to continue its transition from a state-controlled economy to a functioning free-market economy.
So what went wrong?
At least three major economic issues helped cause the 2011 revolution. The first is geographical developmental inequality. Most state investments — such as the construction of hotels and factories — were carried out in coastal areas, giving these regions greater opportunities for economic growth. Meanwhile, the interior regions of the country, deprived of investment, had much greater levels of unemployment and poverty.
Unemployment was another factor, hovering around 13 percent in the immediate years prior to the revolution. Tunisia had about 600,000 unemployed people, of whom 200,000 held college diplomas: The youth population was simply growing faster than the economy.
The third major problem was the corruption of Tunisia’s leader, President Zine el-Abidine Ben Ali, and his family. By the end of his reign, the family owned almost every major business in the country, controlled the privatization of major state assets, captured every major license in every field, and received a commission on almost every large business transaction. The business environment was characterized by injustice, an absence of the rule of law, bullying, and racketeering.
(Of course, the revolution had political causes as well. During his 23 years in power, Ben Ali tolerated no political opposition, and no freedom of press or speech. He jailed, tortured, and even assassinated political dissidents. Using the police and various law enforcement agencies, Ben Ali’s regime effectively repressed both Islamists and communists.)
By late 2010, the level of anger and dissatisfaction across all levels of Tunisian society was unbearable. Following the self-immolation of Mohamed Bouazzizi, a street fruit vendor, citizens took to the streets, and Ben Ali was forced to flee the country on Jan. 14, 2011. The political changes since then have created new challenges for Tunisia’s economy.
First, the revolution weakened the state. Street protests continued for months, demanding a new constitution and a new electoral code to ensure a fair governing system. The existing constitution and the legal system were dismantled, and for a time, the country had no constitution or parliament.
What ensued was a succession of fragile governments. The first government, led by Mohamed Ghannouchi (the last prime minister under Ben Ali), lasted for one week before collapsing under popular street pressure; Tunisians resented that this first congress was composed entirely of the old regime’s elites. The second government lasted six weeks, again brought down by popular street protests. The third government, led by Beji Caid Essebsi, lasted 10 months, and left power only after the election of a constitutional assembly on Oct. 23, 2011. Essebsi’s government devoted most of its energy to ensuring the continuity of the state until the election of a new legitimate government, and was soft on addressing security, social, and economic issues.
The transitional government that was elected in October 2011 consisted of three parties, known as the Troika: The Islamist Ennahda Party and two leftist groups, Ettakatol and Congress for the Republic. While this government is more legitimate and representative than its predecessors, it is still considered to be temporary, and its main function is simply to manage state affairs until a new constitution is drafted and approved. Hence, its ability to carry out any significant economic reform is limited. (In the photo above, youths protest against worsening economic conditions, instability, and lack of opportunity in central Tunisia on Jan. 9.) After two and a half years, Tunisia has finally made moves to reach its goals in the transition process: In October 2013, ruling and opposition coalitions agreed to end to political gridlock, and have since appointed a new prime minister to lead a caretaker government until formal elections in 2014. On Jan. 13, the legislative assembly is scheduled to vote on a final version of the draft constitution. Once the constitution is adopted, Tunisians will be able to elect an assembly and a president for full, five-year terms — giving them full legitimacy to rule. Assuming that no new problems arise, Tunisia will then be able to embark on its new life as a genuinely democratic state.
The second major factor hurting Tunisia’s economic recovery is the state of general social unrest and insecurity. After January 2011, the security apparatus, regarded as the regime’s main tool of oppression, completely disintegrated. By contrast, the army was respected, both because it was regarded as an institution that served the nation, not the individual leader, and because the army refused orders to shoot at protestors.
Yet the army alone has not been able to handle national security problems. Though a gradual police reform process is gradually increasing police presence and improving security on the streets, insecurity caused by the rise in general crime, political violence, and repeated strikes and sit-ins continues to have a devastating effect on investment and economic activity, with the tourism and mining sectors particularly suffering.
Some of this economic and social instability can be attributed to Tunisia’s main labor union, the UGTT (Tunisian General Labor Union), a prominent player since French colonial rule. Under Tunisia’s weak governments, UGTT emerged as the most organized and effective force in the country, exerting substantial pressure through successive strikes and protests in order to increase salaries and subsidies, stop privatization, and recruit workers in the public sector.
This significantly affected the macro-economic equilibrium of the country. For example, in the past two years, the size of the workforce at Tunisia’s national airline increased from 4,000 to 8,000 employees; Tunisie Telecom (the national telecommunication operator) increased from 5,000 to 8,000 employees; the state-owned Phosphate Company of Gafsa (CPG) increased from 9000 to 27,000 employees; and the administration recruited close to 60,000 new public servants — with increased salaries. Meanwhile, repeated strikes and sit-ins at CPG resulted in a $1 billion loss in foreign-currency revenues per year for the past two years.
There is also the specific and new problem of radical Islamist violence, severely tarnishing Tunisia’s image abroad and thereby potentials for tourism and investment. Over the past two years, a small group of Salafi jihadis have resorted to destroying public bars, disrupting cultural events, attacking journalists and political activists, and intimidating women. Jihadis were also responsible for the attack on the U.S. embassy in Tunis on Sept. 14, 2012 (attributed to the jihadi group Ansar al-Sharia), and the assassination of the Tunisian communist party leader, Chokri Belaid, in February 2013.
Another factor hurting the economy is the negative image of the country’s business community, regarded by Tunisians as corrupt capitalists who profited from their close ties to the old regime. Under the current government, there have been more than 800 cases of corruption and money laundering, involving more than 1,200 businessmen and previous government and administration leaders. This climate of constant threat has destroyed confidence, internal investment has completely stalled, and billions of dinars in cash have been withdrawn from the banking system, resulting in a liquidity crisis. Perhaps most crucially, the business climate discourages entrepreneurship, and helps to explain why most of the tens of thousands of unemployed youth are seeking government jobs. It is imperative to restore the image of the private sector in order to encourage entrepreneurship.
Finally, two major external factors continue to affect Tunisia: the European economic crisis, and the war in Libya. Nearly 70 percent of Tunisia’s trade is with EU countries, but due to the economic crisis, there was a reduction in aid, investment, and in industrial orders traditionally awarded to Tunisian companies. In contrast, Tunisia seems to have benefited from the war in neighboring Libya. Because of a complete halt of the food industry in Libya during the war, the food industry in Tunisia has grown at around 35 percent due to exports to Libya. In addition, over half a million Libyans migrated permanently to Tunisia, many of them wealthy, and are boosting (economic) consumption. However, there were major side effects: Food prices sharply increased, and inflation reached 5.5 percent by 2013.
Inflation and the rise in food prices have made it impossible for the new government to meet society’s expectations of an improved standard of living after the revolution. The government proceeded to reduce food exports, fix the prices of some key food items, and maintain food and fuel prices at existing levels — via an increase of subsidies in billions of dinars. This caused the budget deficit to rise to 6.5 percent in 2012. These expenditures come at the expense of much needed infrastructure investment, especially in the interior regions.
Fuel and food subsidies will be a serious budgetary problem in Tunisia for the foreseeable future. Efforts are underway in order to reform the subsidy system, such as by only distributing subsidies to the poor (rather than a blanket program) and by increasing fuel prices at the pump as well as electricity prices.
Despite all these economic problems, Tunisia still has the opportunity to reboot its economy and the investment machine quite quickly. Successive governments increased public expenses in order to stimulate the economy, which resulted in a positive growth of 3.6 percent in 2012, and a drop in unemployment from 18.4 percent to 16.7 percent — though the employment was created mainly in the public sector. Instead, the government must rely instead on increasing productivity and investment in the private sector, by improving security and visibility for investors, boosting private sector confidence, and introducing much needed reforms to improve the business environment.
How can this be achieved? At least three reforms are underway. One concerns the banking sector: After the revolution, public banks were left with many non-performing loans that were allocated through nepotism rather than proper risk management assessment. Today, these banks are in no position to play their expected role in providing the economy with much-needed finances. The reform program has begun by issuing a full audit of these banks and providing recommendations regarding their proper capitalization, as well as better governance practices for the future.
The adoption of a new investment code is another significant reform. The old investment code was vague, most of the lucrative activities were protected, and many authorizations were needed to carry any significant investment. Investors were at the mercy of a heavy administration and arbitrary decisions; corruption was often needed to move through the red tape. The new code is intended to better the investment environment through deregulation and simpler, more transparent rules.
The third reform under way is that of the fiscal code, which aims to alleviate fiscal pressure and enlarge the base of collection to cover more people and economic activities, as well as to allow for banking recapitalization. Moreover, according to a recent IMF study, the informal sector represents 30 percent of GDP. This shows that there is much room for improvement in terms of fiscal income — income which can then be reinvested into pro-growth programs.
The success of the democratic transition in Tunisia is important for more than just Tunisia. It would encourage reform in the Arab world and would prompt regional (and global) stability. Tunisians alone can ensure the success of the political aspects of the transition. But the international community can contribute to improvements in both security and the economy. Aid for Tunisian law enforcement, which needs equipment and training in order to fight crime, track terrorists, and control borders, is crucial. On the economic front, the country desperately needs investment, and is unable to respond to the expectations and needs of its population in the current transition period. Patience is eroding, and we may not witness the democratic fruit of the revolution if no progress is made. Foreign direct investment is still low, however, due to the global financial crisis and also the lack of stability in this transition period.
At this stage, the solutions to Tunisia’s economic pains remain largely political. Today, all political stakeholders recognize that it is urgent to shorten the current transition period by accelerating the adoption of the new constitution. This will open the way for a new, strong, and legitimate government and institutions capable of achieving national reconciliation and engaging reforms, thus insuring predictability for at least one full term. If the political transition continues on this path, and the incoming government carries through necessary economic reforms, we can realistically be optimistic about the success of the Tunisian experience.