By Clara Capelli, Senior Economist, Cooperation and Development Network – Pavia
Jobs and fairness will come with economic growth. Growth will come with improved business and investor confidence, which in turn will come once Tunisia can cut its deficits, and control debt and inflation”
IMF’s response to an article published by The Guardian criticizing the organization’s austerity-based requirements in Tunisia is a clear indication of the theoretical framework and the causal links inspiring its operations.
IMF is not the only international donor promoting supply-side policies in Tunisia as well as in the MENA region. Domestic governments in the area have hardly changed their economic agendas, although 2011 uprisings made clear how social discontent was fueled by dire economic conditions and widespread, long-term unemployment.
However, the IMF’s Extended Fund Facility (EFF), a 4-year programme approved in May 2016 of US $ 2.9 billion, has played a significant role in shaping Tunisia’s macroeconomic policies, which have in turn contributed to impact on Tunisians’ purchasing power and prospects. In early January 2018 – a very eventful month in Tunisia’s history – people took once again to the streets to protest against 2018 Finance Law, which incorporates several IMF’s recommendations on fiscal discipline.
This law includes a number of fiscal measures to cut the budget deficit to 4.9 of the GDP and comply with the requirements of EFF, meant to promote macroeconomic stability and improve the business climate for private investors.
Nevertheless, this law will hardly unleash sustained private investment rates, let alone growth. It introduces a package of increases in indirect taxation (e.g. the VAT rates, purchase taxes on several consumer goods, the cost of fuel and electricity, etc.) and raises the fiscal burden on enterprises and formal public and private employees, with serious and worrying implications on social justice and redistribution.
The importance of facilitating private initiative in an efficient and transparent way through better governance and institutional reforms may sound as a reasonable point for everybody to agree upon. Yet, a serious discussion is needed on what kind of private initiative is to be promoted and in which sectors.
Tunisia is still stuck in a stagnant economic model consolidated over the past decades, characterized by a huge dependency on foreign demand and capital, driven by tourism, export-oriented manufacturing (mostly consisting of mere assembling and/or low-value-added activities, mostly in the textile, mechanical and electronic sectors) and call centers. This model has proven to be extremely polarizing – both socially and geographically -, as it is traditionally based on low wages and a productive structure concentrated along the coastal areas, marginalizing the hinterland and unable to evolve into a model that can prompt productivity gains and long-term growth.
It is not a coincidence that most of the governorates where the protests recently took place are among the poorest and underserved of the country, together with the many peripheries of the biggest cities in Tunisia, starting from the suburbs of Tunis. The same pattern can be observed going back to the protests, sit-ins and demonstrations of January 2016 – mainly criticizing the government for the lack of job opportunities and the long-term prospects of growth – as well as to the uprising that led to Ben Ali’s resignation and escape in January 2011.
Over the recent years, the most vulnerable as well as the middle class have also been suffering from the dramatic fall of the Tunisian dinar (approximately -10 percent between 2015 and 2016 and -20 percent between 2016 and 2017 with respect to the euro), a measure required within the framework of the EFF as a more flexible exchange rate regime is seen as “instrumental in supporting Tunisia’s export sector”.
It is true that Tunisia is extremely dependent on the foreign sector: trade accounted for almost 90 percent of the GDP in 2016. However, its productive structure does not seem to allow for significant reallocations in trade in the future. According to the most recent data of the Tunisian Institute for Statistics on merchandise trade (in constant prices), exports contracted by 0.1 percent between 2015 and 2016, but rebounded by 4.3 percent in 2017, while imports increased by 2.8 percent in 2016 and 2.6 percent in 2016.
The recovery in exports was largely driven by agricultural products (+7.1 percent) and fuels exports (+6.7 percent), which had shrunk by 21.8 percent and 13.4 percent in 2016, respectively; the textile sector decreased by 0.7 percent in 2016 and increased by 1.1 percent in 2017, while mechanical and electronic exports increased both years by 8.1 and 5.5 percent.
Despite these growth rates, it is yet to be understood how this export pattern may ‘trickle down’ to the rest of the economy and benefit Tunisia in an ‘inclusive’ way, being these activities localized in very specific areas, based on low wages coupled with low productivity and often part of the so-called ‘offshore regime’, which involved a number of fiscal incentives and exceptions for export-oriented enterprises.
On the other side, the import pattern seems to show a strong reliance on imports from abroad for consumption that hardly be substituted with domestic products. Therefore, the depreciation of the Tunisian dinar is very likely to have harsh redistributive repercussions, impoverishing the majority of the population while favoring businesses that a rather limited growth potential and that cannot allow for substantial wage raises or sustained job creation rates.
More than 7 years after the 2011 uprising, Tunisian political leaders have not been able to set a new course for the country’s economy and growth and international donors have not helped in discussing a new development model. While claiming to have private sector development and FDI promotion as their main ultimate economic objective, they fail to elaborate a strategy tailored to Tunisia’s limited economic size and challenges. The country is sandwiched between Algeria and Libya, in one of the least economically integrated regions of the world, which also remains strictly linked to much larger and stronger European economies.
Foreign investors seem to be not particularly attracted by the small Tunisian economy despite the incentives of the offshore system (introduced in 1972 to facilitate export-oriented investment), largely preferring other destinations such as Morocco, which has put in place very aggressive investment-attraction policies over the last years. Tunisia is a rather peripheral country in the global capitalist world, dependent on foreign capital but only able to attract it mostly through generous fiscal incentives and wage compression.
This became clear in November 2016, following the flop of the investment conference Tunisia 2020: Road to Inclusion, Sustainability and Efficiency, which aimed at finding potential investors for 141 projects of an overall value of 50-60 billion Euros) and collected only 14 billion euros of pledges from international organizations and donors. How is macroeconomic discipline going to encourage private investment and FDIs in particular in an economy with these very specific constraints?
Private sector development policies do not necessarily foster sustained private investment if investors do not find a business profitable. Growth driven by private investment does not necessarily come with job creation and fairness, as redistribution is neither an automatic nor a ‘natural’ process. It is the result of a political process. On the contrary, such a growth pattern may create distortions and bottlenecks that can hamper long-term development.
A radical rethinking of the redistribution and social consequences of macroeconomic stability and private sector development is more than ever necessary, and the Tunisian case is paradigmatic in showing that reversing causal links may be the first step for economic theory to contribute in it.
 From the page IMF in Tunisia, FAQs section (last accessed: 22nd January 2018), https://www.imf.org/en/Countries/Tunisia/QandA/tunisia-qandas#q3