Libya Tribune

By Marwan Muasher,  Marc Pierini,  Fadil Aliriza

If Tunisia’s top-down strategy to boost investment and private-sector growth is to succeed, a bottom-up approach is also needed to address the country’s most urgent challenges.

PART TWO

An Economic Approach to Political and Social Challenges

Tunisian policymakers and their international partners have rightly identified economic issues as driving many other problems in Tunisia. The government’s strategy has been primarily to work on a series of liberal economic reforms that it believes will boost foreign investment while relaunching the economic approach based on five-year plans that was a staple of the Tunisian state’s policy tool kit. The last five-year plan, which covered the period from 2007 to 2011, was the eleventh of its kind in Tunisia’s history. Following the uprising, political instability largely prevented the formulation of a new plan, a factor that gives added symbolic importance to the latest drafting of the twelfth five-year plan.

Reaping the direct benefits of private foreign investment is generally believed to be a long-term goal, and this is clearly a priority for the Tunisian government. In the short term, complying with IMF recommendations for legislative changes will also provide fiscal support at a time when wages and debt-servicing payments are increasing.16 It will also send a strong signal to international financial institutions and bilateral partners that they should commit to Tunisia and assist in building the development projects that represent real investment and create jobs.17

The government’s other priority, which cannot be immediately addressed by fiscal and regulatory reform, is combating unemployment. At 31 percent for young people,18 unemployment remains one of the main drivers of unrest and is a source of other major social and economic challenges. In the words of Abdelkefi, unemployment represents “the biggest economic and social problem in Tunisia. . . . The war against unemployment, I consider it as important as the war against terrorism.”19

The first policy challenge with regard to employment is public-sector hiring (see box). Between 2010 and 2014, the number of public-sector employees increased from around 480,000 to about 580,000, not including employees in public companies.20 Unemployed graduates in marginalized interior regions in particular have held hundreds of demonstrations and sit-ins demanding public-sector employment. Graduate unemployment is a burden on a state that has invested in its higher-education system—the share of the Tunisian population with tertiary education more than tripled from around 4 percent in 1990 to above 12 percent by 2010—without investing in corresponding employment sectors or using policy to effectively encourage private-sector employment that would match the education of its graduates.21

Box 1. Between Public Wages and Public Debts, Little Room for Investment

The approach of previous governments to the problem of unemployment and unrest linked to unemployment and other social issues has been to increase public-sector hiring and public-sector wages. In a long television interview, Abdelkefi offered an analysis of the macroeconomic consequences of this policy:

Over past five years, we’ve been having growth coming from wages—public-sector wages [went from] 6 billion dinars [$2.7 billion] in 2010 to 13.2 billion dinars [$5.9 billion] in 2016, which is 70 percent of our fiscal revenue. . . The margin for maneuver in the national budget at the moment is no longer possible. . . Now we have no choice but to encourage internal and external investment.22

Debt-service repayments are also boring a hole through Tunisia’s finances. In the same interview, Abdelkefi noted that public debt as a percentage of gross domestic product had gone from 40 percent in 2010 to about 62 percent in 2016 and that this number rose to 80 percent when “taking into account guarantees the Tunisian government has given to certain institutions.”

The government’s proposed solutions aimed at encouraging internal and external investment need to be nuanced. Private investment in agriculture, for example, has had negative effects on small-scale farmers.23 Meanwhile, if the government constrains wages, this not only will have a social impact but also could hurt growth by curbing consumption and negatively impacting aggregate demand in general.

One alternative to increasing public-sector employment is promoting entrepreneurship. SMEs, after all, are often the biggest job creators. According to the new state secretary to Tunisia’s minister of employment and professional training in charge of private initiative, the state is just beginning to see promoting entrepreneurship as part of its role. This means cutting red tape, restructuring financing, and democratizing market access. In the case of red tape, what is important is to help remove administrative barriers to entrepreneurship, for example by reducing paperwork for registration and compliance or including “self-employed” as a formal category on national identification documents.24

Restructuring financing is more difficult. Private banks are not lending very much to SMEs, reserving their lending mostly for big corporate clients. However, public banks, in particular the Banque Tunisienne de Solidarité (BTS), have also been behaving like private banks since the revolution, measuring their performance in terms not of projects funded or businesses or jobs created but of their bottom line. The BTS had previously operated under the close supervision of the governing Democratic Constitutional Rally (RCD) party in what was an authoritarian, single-party political system. Under this system, state banks operated in a way that some have identified as showing favoritism to regime allies, by offering bad loans while benefiting from regular recapitalization from the state.25 Without the benefit of this insurance since the RCD was dissolved after the 2011 revolution, the BTS has been making far less risky loans, thus contributing to the dearth of financing opportunities that SMEs are experiencing. Another problem is that the finance-management system of the BTS is not tailored to small businesses that can sink if they miss a month or two of salaries. The Tunisian government appears to be aware of these challenges and is actively looking for solutions.

One other barrier to SMEs is the strong market control of well-established businesses, which leads to a lack of competition. Moreover, opaque operations in import and export licenses as well as unequal policing and compliance checks that target smaller businesses and ignore larger firms have further inhibited the growth of small and medium-sized competitors. These hurdles may be exacerbated if chamber-of-commerce operations are centralized and if regional chambers of commerce lack the capacity to effectively and independently advocate for and promote local private industry.26

Reforming customs and tax regimes in a way that democratizes market access will be difficult but will go a long way to incorporating the informal sector into the formal sector and making the best use of its job-creating energies.

As a result of these formal barriers, many SMEs operate in the informal sector, which by some estimates represents over half of the market and, according to Carnegie’s April 2016 paper, has “overtaken the formal economy in terms of . . . GDP.”27 Although Tunisia’s informal sector, particularly in illicit commerce with products smuggled from Algeria and Libya, is a source of employment, it is not regulated and is largely out of the state’s control. This means that the state loses tax revenues while workers in the informal sector lack social and job securities.28 Reforming customs and tax regimes in a way that democratizes market access will be difficult but will go a long way to incorporating the informal sector into the formal sector and making the best use of its job-creating energies.

Another challenge to increasing employment has been the fact that state-sponsored technical training programs are not up to the standards of professionalization needed in the current job environment. Moreover, internships and apprenticeships are not yet major institutions in Tunisia. As the minister in charge of entrepreneurship explained, “If we want the capacity to do big infrastructure, we need more hands-on training.”29

If the government tackled unemployment through a jobs program outside the formal structure of traditional public-sector employment, this might avoid the traditional problems associated with a bloated public sector—employment as entitlement without corresponding performance evaluation in terms of productivity or service to citizens. This approach could include temporary contracts in dinar-denominated public works projects that would not require increasing the burden on foreign-currency reserves or international financing. Urban management, hostel care, and arts projects are all works that could enable the long-term unemployed to develop work skills while alleviating unemployment, according to one scholar developing a proposal along these lines.30 The funding for this could potentially be raised through a sale of dinar-denominated Treasury bills issued by the government in coordination with private investors.

New Investment Code

As for regulatory reforms, Tunisia’s new investment code should come as a welcome change for foreign investors. Adopted by the country’s parliament on September 17, 2016, the law is much shorter than the previous code and is intended to be simpler.31 The old code had helped bifurcate Tunisia’s economy into an offshore sector and an onshore sector, a dichotomy that the World Bank found kept “both sides of the economy trapped in low productivity” and “accentuated regional disparities.”32

Moreover, the new code lays out the creation of a High Investment Board that will coordinate all licensing. Government officials say they see this board as a one-stop shop for investors and that it will be responsible for coordinating the licenses, permits, authorizations, and other administrative obstacles normally issued by multiple other administrative bodies. The government acknowledges that the investment code is not perfect, but Abdelkefi has described it as a “first step” and sees it as putting Tunisia on a par with other countries in the Mediterranean in competing for investors.33

Development Policy

The five-year development plan spanning 2016–2020 will be one of the main features on display at the Tunisia 2020 investment conference. This is the first time since the 2010–2011 uprising that the Tunisian state has managed to draft and coordinate a five-year plan, a staple mechanism of Tunisia’s statist economy. The document has not been fully concluded as of this writing. However, the former minister of development, who played a major role in crafting the plan, said that the document had received widespread input after numerous meetings across Tunisia.34 Meanwhile, EU ministers identified the plan as “a pillar to enable Tunisia’s partners to target their support and financial assistance.”35

Hard numbers are subject to change, but one version of the plan lays out projects worth about $60 billion over the next five years, with some of the financing to be paid after the five-year time horizon.36 Of this budget, roughly two-thirds is expected to come from external financing, the rest from the Tunisian state’s own sources of revenue. One notable achievement of this plan, according to the former development minister, is that it was negotiated between most of the main political parties, which come from vastly different ideological backgrounds. Moreover, the plan was designed with roughly 70 percent of the budget going to development in the sixteen least-developed interior governorates of Tunisia and about 30 percent to the remaining eight more-developed coastal governorates.37 Given that Tunisia’s population is more concentrated in developed regions, these numbers represent development weighted toward poorer regions.

The five-year plan represents only an aspirational development policy and must be implemented through the yearly budgetary procedure. But it offers a vision that Tunisia hopes will have the support of its partners, both state and institutional investors as well as private-sector actors. Much focus has been drawn to foreign direct investment; yet privately, top officials, numerous policymakers, and outside observers recognize that local Tunisian capital must also start investing to help attract foreign private capital. This is particularly true of interior regions of the country.

In this spirit, Prime Minister Youssef Chahed convened a semipublic meeting with Tunisia’s biggest domestic businesses and conglomerates shortly after taking power in August 2016. In the meeting, Chahed called business circles the untold “success stories” of Tunisia, asking them to invest in less-developed regions.38 Some Tunisians have criticized this meeting for not including SMEs, emphasizing the notion that only big businesses have access to top officials. However, members of the prime minister’s team saw the meeting as a first step to building a positive relationship with the people who can reshape the economy under the right conditions.39 Moreover, the communication strategy of spotlighting domestic success stories could build pressure on the private sector to play a more positive role in public policy during a time of economic crisis.

Bottom-Up Challenges to Democratic Consolidation and Economic Resilience

The success of a continuing partnership aimed at facilitating Tunisia’s political and economic development does not depend on cooperation mechanisms or legislative reform alone. There are a host of bottom-up challenges that, if not addressed by all stakeholders in cooperation, risk playing a spoiler role in Tunisia’s consolidation of a formal political system that can respond to its citizens. These challenges are numerous, but the most urgent at present are enhancing public buy-in, addressing corruption, and decentralizing governance.

Carnegie’s April 2016 paper identified five key commitments that could help guarantee Tunisia’s success. Two of these were, first, revitalizing public outreach and launching an inclusive dialogue with all stakeholders and, second, “advancing reforms that can gain public buy-in and remove obstacles to economic growth, particularly in marginalized communities.”40 The methods with which the Tunisian government has since implemented economic reforms, however, have diminished public buy-in and reduced public outreach. The politics of consensus have, to some degree, successfully mitigated divisions among elite political figures through closed-door meetings. But this approach has had the effect of marginalizing the formal opposition and further redirecting contentious politics into informal forms, such as strikes, sit-ins, and popular protest movements.41

Enhancing Public Buy-In

The liberal economic reforms enacted by the Tunisian government have come alongside a proactive media strategy. However, these reforms could have benefited from more robust and transparent public debate and more diverse input. Managing continuing social tensions will require further work to build public buy-in for the government and its policies.

The practice of building consensus among elites played its first crucial role in shaping Tunisia’s postrevolutionary governing system in the form of the Tunisian National Dialogue Quartet. This group of four nongovernmental organizations came together in summer 2013 to resolve a political crisis that politicians appeared unable to handle. That crisis was fueled by a combination of extreme public unrest and ideological polarization over the role of religion in the state and was sparked by two political assassinations and a series of high-profile attacks by militants against Tunisia’s security forces.

This quartet’s role in successfully navigating Tunisia toward a nonviolent political solution earned the four organizations a Nobel Peace Prize in 2015, but many interpret the prize as validating the efforts of the entire Tunisian people to work together on what professor Charles Tripp called a “common political project,” namely the second Tunisian republic.42

The politics of elite consensus continued after the 2014 parliamentary and presidential elections with a governing coalition between the two major parties, Nidaa Tounes and Ennahdha. The formation of a new government in August 2016 extended this tradition. In June 2016, the presidency of Essebsi, a former Nidaa Tounes leader and co-founder, launched a process for a new government of national unity. In a series of consultations over summer 2016, nine political parties, the UGTT, an agricultural union, and the Tunisian Union of Industry, Trade, and Handicrafts (UTICA) reached the Carthage Agreement, which outlined a broad set of shared policy priorities. The end result of this process was a new government that includes more parties and two ministers who have close ties to the UGTT leadership.43 One member of the government from Ennahdha was pleased to note that several politicians who had previously vowed never to work with her party are now in a coalition government with it.44

But this politics of consensus often clouds the reasons why consensus building began. Not only was there fierce ideological polarization that demanded consensus building in 2013, but extreme unrest with multiple root causes has also contributed to continuous antigovernment sentiment since the 2010–2011 uprising.45 The reasons for this unrest reflect the reasons for the revolution: a lack of economic opportunities, a lack of dignity for citizens in their relations with the state, and a lack of public services, housing, and development. In addition to these grievances—after the revolution—came inflation and low growth.

These fundamental problems that fueled the unrest that prompted consensus building have not gone away as a result of inclusive consensus building. In fact, public attitudes toward the government in general have deteriorated. For example, 91 percent of young Tunisians lack confidence in the parliament,46 while other state institutions also suffer from a lack of trust.

Between January 2015 and May 2016, more than 5,000 demonstrations took place across the country.47 Nationwide protests erupted in January 2016 after a young man killed himself demonstrating against nepotism in public hiring that resulted in the removal of his name from a job list; this led to widespread unrest and clashes between police and demonstrators.48 The situation calmed down only after nationwide curfews, a carefully moderated police response, and the announcement of populist, though nonbinding, economic reforms by then prime minister Essid. These underlying social dynamics and the remaining chasm between citizens and the state reveal the limits to the kind of consensus building that has dominated Tunisian politics.

91 percent of young Tunisians lack confidence in the parliament, while other state institutions also suffer from a lack of trust.

The reason for the change in government in August 2016, according to Essebsi, was that the previous administration had been unable to address the challenges facing Tunisia, particularly its economic issues.49 However, a number of Tunisian political commentators, including critics and allies of the government alike,50 see the reshuffle as an extension of executive power, particularly presidential power, at a time when there is a distrust of leadership. In the continuing absence of a constitutional court, the creation of which remains on the legislative agenda, disputes over executive authority and between the executive and legislative branches will remain up in the air in a way that allows the traditional practice of a strong presidency to shape politics.51

The ability of consensus politics driven by a strong presidency to eventually address social issues will remain a fundamental issue. When it comes to specific legislative reforms, the recent reform agenda has also revealed a significant gap in public buy-in, inclusion, and transparency. From 2011 to 2014, Tunisia had an open legislative process and political development more broadly, but this openness is not yet fully institutionalized. An open environment is a key feature of Tunisia’s democratic development: it was the process’s openness to civil society, the media, and citizen advocacy that allowed for the kind of compromise that characterized the debate, drafting, and ratification of the 2014 constitution.

Several recent pieces of legislation have been hammered out in the so-called consensus committee in the parliament. Originally designed to iron out disputes to pass the 2014 constitution, the committee has now been used to debate sensitive laws that will affect the future structure of the Tunisian economy and redefine the role of the state. That is despite the fact that the committee’s existence is not stipulated in the parliament’s internal procedural rules. Consensus committee meetings take place largely without the attendance of journalists or civil society watchdogs. Moreover, minutes from the committee’s proceedings are either not recorded or not published.52 At the same time, plenary parliamentary sessions—which allow for public meetings between members of parliament and the government and opportunities for questions on policy—have not been occurring on a monthly basis as outlined in the parliament’s internal rules.

Other factors have added to the opacity of the legislative drafting process. While there are many potential benefits to a well-crafted investment code, some stakeholders—including government officials—believe that public debate was limited and parliamentary discussion rushed. Tunisian policymakers privately express that they have had to move forward with reforms at a pace that is too fast. Fiscal assistance conditions have, in the words of one parliamentarian, “tied the hands” of legislators.53 Some also consider that the rewards of investment and assistance have been used to shape legislative changes, in effect circumventing broad public debate.54 In October 2016, the secretary general of the UGTT criticized the way in which Tunisia’s international partners were approaching economic reforms, arguing that their approach did not take into account the fragility of Tunisia’s democracy.55

Policymakers privately express that they have had to move forward with reforms at a pace that is too fast.

For other stakeholders, external private actors may also influence the legislative process in ways that are not transparent. After two different members of parliament lodged accusations that their colleagues were taking bribes in return for legislative favors, the state launched a judicial inquiry into the allegations.56 Meanwhile, strict rules on the disclosure and transparency of lobbying are not yet central to Tunisia’s governing framework.57 All of this suggests that Tunisia needs more robust rules governing conflicts of interest, political money, and lobbying.

Another of the five key commitments identified by Carnegie’s April 2016 paper was a fast-track mechanism for certain development projects. The paper described the mechanism as a ministerial committee that would identify shovel-ready projects, expedite traditional authorization procedures, and bypass normal public procurement processes. The essential aim of this fast track is to unfreeze infrastructure projects, particularly in disenfranchised regions of Tunisia. In line with this recommendation, Tunisia has taken steps to discuss a version of a fast-track mechanism, something that the minister of development has called an “economic emergency law.”58

This is potentially a positive step for unfreezing development projects. An early draft of the law, however, proposes that large-scale development projects be exempt from parliamentary oversight. A team responsible to the prime minister will largely be in charge of deciding the designation, without input from the legislature. Frozen projects could benefit from a mechanism that cuts through red tape, but lawmakers should consider the risks of increasing executive authority and circumventing public discussion and scrutiny. No mechanism is suggested in place of the procurement process for ensuring anticorruption measures, and there are no clear guidelines governing potential conflicts of interest.

Addressing Corruption

One of the main challenges to solving Tunisia’s economic problems is corruption. Even if a new investment climate is encouraged through the enactment of liberal economic reforms, informal negotiation with all sorts of bureaucratic actors will persist. Local government actors, utility companies, customs officials, and police officers are able to make independent demands on business actors, leaving investment vulnerable to potential corruption. Comprehensive tax and customs reforms are key in this respect. What is more, successive governments have not addressed the potential for high-level corruption, and the lack of truly public disclosure of assets by high-ranking officials risks leaving the political system vulnerable to favoritism and cronyism.

The initial rhetoric of the new government seemed to indicate that fighting corruption would be its second priority after fighting terrorism.59 Chahed asked his ministers to disclose their assets within ten days of taking office. Ministers, as well as many other civil servants, are already required by a 1987 law to submit their declared assets in a sealed envelope to the Court of Auditors.60 This envelope, however, remains sealed unless a court case requires its disclosure. The 1987 law also requires that when they leave office, elected officials disclose their assets once more, though compliance with this procedure is reportedly low.61 This system is different from genuine public disclosure of assets, which could have a positive effect on overall government transparency. Moreover, Article 11 of the Tunisian constitution declares that the president and legislators must also disclose assets, but there has been no legislation in the two years since the passage of the 2014 constitution to codify this constitutional principle.

While Tunisia has an anticorruption authority, it and its budget are under the control of the prime ministry. This hinders the authority’s independence and ability to investigate corruption. The organization seems to have been given some new life in January 2016 with increased funding and fresh leadership.62 The authority says it has received 1,937 complaints since the beginning of 2016, of which it submitted 832 dossiers to investigators and 106 to the Ministry of Justice.63 It is unclear, however, how many of these cases the body has managed to resolve and whether the justice system more broadly has the capacity or will to resolve them.

As for illicit financial flows, the volume of this capital has exceeded debts in Tunisia over the last several decades, according to one report.64 This suggests that the current economic development model could be radically reshaped if the war against corruption were waged vigorously. The report found that Tunisia lost on average $905 million annually due to illicit capital flows between 1970 and 2010. At the macroeconomic level, these flows take the form of incorrect invoicing and tax avoidance.65

Tunisia can take steps to address this problem by reforming the customs and tax regimes so they are fairer, more transparent, and more professional. This will be a largely political fight and requires the will to combat legally operating monopolies and informal trade networks equally. If this task is not a priority, illicit capital flows may undermine Tunisia’s capacity for development.

There are numerous other ways to cut down on corruption with which both the Tunisian government and its international partners can help. One way is to introduce legislation that requires public disclosure of assets for top elected officials, in line with Article 11 of the constitution. Another is to work toward implementing greater tax transparency, which could help boost tax compliance. A third option is to commit more political capital to investigating and prosecuting public servants as well as private-sector actors who are found guilty of corruption. Strict, vigorously enforced laws on lobbying and political financing could also reduce the potential for corruption.

Tunisia’s international partners can help reduce corruption in several ways, which is also in their interest. One is to track development money and publicize budgets at every phase of the project cycle, from materials to wages. More than that, the international community can consider pushing for stronger international cooperation to cut down on illicit capital flows and tax havens.

To be continued

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Carnegie Endowment for International Peace

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