Overcoming the Binding Constraint to Economic Growth in Post-Revolution Tunisia

Duncan Pickard & Todd SchweitzerJohn F. Kennedy School of Government

Harvard University

March 2012

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OVERCOMING THE BINDING CONSTRAINT TO ECONOMIC GROWTH IN POST-REVOLUTION TUNISIA

Duncan Pickard & Todd Schweitzer1

John F. Kennedy School of Government Harvard University

March 2012

About this report This report was written under the tutelage of the African Development Bank as a Policy Analysis Exercise in partial fulfillment of the Master in Public Policy degree at the Harvard Kennedy School. Some of the economic analysis was adapted from “Tunisia: A Growth Diagnostic,” De-cember 2011, by Todd Schweitzer, Jake Cusack, John Vrakas, and Alireza Abdolah Zadeh. We thank Meghan O’Sullivan, Ricardo Hausmann, Stephen Kosack, and Monica Toft, as well as the Ash Center for Democratic Governance & Innovation, the Belfer Center for Science & Interna-tional Affairs, the African Development Bank, and the Millennium Challenge Corporation. About the authors Duncan Pickard is a second-year MPP student at Harvard studying international affairs and Middle Eastern politics. He interned in summer 2011 with the International Foundation for Elec-toral Systems in Tunis, where he worked with the transitional government on electoral reform and voter registration. He also researched institution building and political-party development in Tunisia, which as formed the basis for three papers he has published on Tunisia’s transition to democracy and a comparative study of constitutional drafting in North Africa. Pickard studied Arabic in Jordan, interned for the political section at the U.S. Embassy in Damascus, and worked for the Carnegie Endowment for International Peace. He graduated magna cum laude from Tufts University with concentrations in History, Middle Eastern Studies, and American Studies. Todd Schweitzer is a second-year MPP student at Harvard with a concentration in political and economic development. He spent the summer of 2011 at Deloitte Consulting’s Public Policy Practice in Abu Dhabi, United Arab Emirates, where he was involved on strategic engagements across the Gulf region focusing on economic diversification and industrial development. Prior to graduate school, he spent almost three years in the Dominican Republic as a community eco-nomic advisor in the Peace Corps. His projects included managing a national youth entrepre-neurship initiative and establishing a community relations program for Damajagua National Park. As an undergraduate student he interned with USAID in Afghanistan and the US State De-partment at NATO headquarters in Brussels, Belgium. His award-winning undergraduate honors thesis focused on institutional challenges to civil-military cooperation in Afghanistan. Todd graduated cum laude from the University of California, Irvine with degrees in Economics and International Studies.

1 Feedback is welcome at dpickard9@gmail.com and tschweitzer@gmail.com.

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Contents Executive Summary .................................................................................................................................... 3!Introduction ................................................................................................................................................. 4!Literature Review ........................................................................................................................................ 6!Constraints Analysis ................................................................................................................................. 11!Policy Options ........................................................................................................................................... 25!Implementation Plan ................................................................................................................................ 29!Appendix A: Figures ................................................................................................................................. 32!Appendix B: Wanted Data & Further Research .................................................................................... 46!References ................................................................................................................................................... 48! Figures Tunisians' top priorities for their government, May 2011. ................................................................... 4!Economic complexity and GDP/capita, 2008. ...................................................................................... 10!The HRV growth diagnostics tree. .......................................................................................................... 11!Growth diagnostic heat map. ................................................................................................................... 24!Summary of recommendations and implementation plan. ................................................................ 31!FDI inflows, 2000–2008. ........................................................................................................................... 32!Nonperforming loans, 2002–2011. ......................................................................................................... 32!Domestic credit provided by banking sector, 2000–2010. .................................................................. 33!Market capitalization, 2000–2010. .......................................................................................................... 33!Gross domestic savings, 2000–2010. ...................................................................................................... 34!Firm satisfaction. ....................................................................................................................................... 34!Internet users, 2000–2010. ....................................................................................................................... 35!Costs of exporting and importing. .......................................................................................................... 35!Age dependency ration, 2000–2010. ....................................................................................................... 36!Age distribution, 2010. ............................................................................................................................. 36!Fertility rates, 2000–2009. ........................................................................................................................ 37!Educational achievement by age cohort, 2010. ..................................................................................... 37!Educational achievement by age cohort and gender, 2010. ................................................................ 38!Labor force participation, 2000–2009. ................................................................................................... 38!Female labor force participation, 2000–2009. ....................................................................................... 39!Unemployment rates by age cohort, 2005–2009. ................................................................................. 39!Unemployment rates by education level, 2005–2009. .......................................................................... 40!Job seeking by education level, 2010. ..................................................................................................... 40!Public spending on education, 2010. ...................................................................................................... 41!Average wage changes, 1987–1997. ........................................................................................................ 41!Exchange rates, 2006–2010. ..................................................................................................................... 42!Economic dependence, 2010. .................................................................................................................. 42!Current account balance, 2000–2008. .................................................................................................... 43!Export and GDP growth in Tunisia, 1990–2010. ................................................................................. 43!Total tax rates in the African Union. ...................................................................................................... 44!Anti-competitive behaviors, 2005–2006. ............................................................................................... 45!

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Executive Summary The new Tunisian government must quickly enact pro-growth reforms to overcome the legacy of the former dictatorship’s burdensome economic policies. The flight of tourists, the deepening crisis in Europe, and the relative social instability of post-revolution Tunisia all weaken the re-public’s ability to create jobs and satisfy the central interest of many Tunisian revolutionaries: the restoration of human dignity. This report outlines policies that the Tunisian government can implement during the twelve months of its mandate to generate the most growth most quickly. First, it identifies the binding constraint to economic growth according to the method proposed by Hausmann, Rodrik, and Velasco. Second, it presents policy options for overcoming the binding constraint. Third, it offers an implementation strategy for the recommended options. In brief, the binding constraints on the Tunisian economy are microeconomic risks associated with an overly burdensome state. The risks are highest in (1) the labor market, (2) the commer-cial system, and (3) the protection of property rights, all of which the Ben Ali government de-graded with intrusive policies that resembled central planning. The legacy of these policies re-mains. The challenge of the current government is to reverse the damage done. In order to overcome the binding constraint, the Tunisian government should:

1. Equilibrate supply and demand in the labor market by facilitating a private-sector-oriented higher education sector;

2. Balance competitiveness in the domestic and export sectors; and 3. Reform the domestic security system to protect property rights.

Some of these policy recommendations will be easier to implement than others. When prioritiz-ing them, the government should consider the synergies between them and the ease of selling them to constituents. In general, the government should emphasize the policies’ potential to cre-ate jobs and promote long-term growth.

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Introduction The drivers behind the 2010–2011 Tunisian protests are multifaceted. Even if we limit ourselves to the story of Mohammed Bouazizi, the fruit seller in Sidi Bouzid who set himself on fire in Jan-uary 2011, the revolution’s impetus is not clear. Was Bouazizi frustrated by his interminable un-employment? By the network of corruption that allegedly impeded his work? By the decades of dictatorship that privileged the Tunisian middle class living on the Mediterranean coast? Some Tunisians would dismiss these reasons and say that the revolution was about the triumph of Is-lamic over secular government, or of liberty over autocracy. The most consistent theme of the revolution that spanned economic and political demands was reclamation of dignity that many Tunisians felt was under attack by the ancien régime. Broadly speaking, the call for dignity attracted educated, under-employed Tunisians living in cities with the same clarity that it attracted unemployed youth in Sidi Bouzid and elsewhere. We are inspired by the popular revolution that in less than thirty days toppled Zine El Abidine Ben Ali, a dictator who had ruled for twenty-three years. One of us (Pickard) spent eight weeks in Tunisia in summer 2011 working on electoral reform. We have since visited Tunisia four times, and each time witnessing a different phase of the transition: election day in October, the first meeting of the National Constituent Assembly, the appointment of the new cabinet, and the throes of constitutional drafting. On each visit, we met with leaders in business, government, and academia to track their views on economic development as the politics evolved. In our February visit, we visited the rural interior to put into context the economic grievances of the unemployed that have changed little since December 2010, and that quantitative data do not reveal.

Figure 1. Tunisians' top priorities for their government, May 2011. 1st mention 2nd mention 3rd mention Total Security-sector reform 36% 21% 14% 71% Job growth 27% 25% 20% 72% Development and reform of the economy 9% 19% 13% 41% Organizing elections 7% 3% 6% 16% Improving living standards 6% 8% 6% 20% Social reforms 3% 4% 9% 16% Anti-corruption measures 2% 1% 2% 5% Transparent communication 2% 2% 2% 6% Inculcating good values in the government 2% 0% 0% 2% Regional development 1% 1% 3% 5% Achieving goals of the revolution 1% 0% 0% 1% Other 3% 16% 25% 44% Don’t know/refused 1% 0% 0% 1%

Source: International Republican Institute !

We write the report in the midst of tension between political and economic development in Tu-nisia. The constituent assembly plays two roles: to write a new constitution for the republic in time for legislative and presidential elections in fall 2013, and to serve as Tunisia’s interim legisla-ture. The first role speaks to the need of the government to quickly build legitimacy for itself in a country without a constitution, the second for swift policy interventions to satisfy the demands of the revolution and assure the Tunisian people that the legislature is responding to its demand for

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jobs, which is among Tunisians’ chief demands (Figure 1). Amid strikes and work stoppages, the constituent assembly and the cabinet must simultaneously tackle the republic’s most pressing economic and political challenges since independence.2 Outline of paper Our goal in this report is to help Tunisia’s first democratic government, and its international supporters, make sound economic policy decisions that have high-impact, cost-effective, and timely improvements to the citizens’ quality of life. We (1) review relevant literature; (2) identify the binding constraint to growth in post-revolution Tunisia; (3) present policy options designed to overcome the binding constraint; and (4) conclude with an implementation strategy for the recommended policy options. The constraints analysis follows the growth-diagnostics method outlined by Hausmann, Rodrik, and Velasco (HRV) in 2005. The report is targeted at the cabinet of Prime Minister Hamadi Jebali, the National Constituent Assembly, and the international development community. The report is of particular relevance to the ministries of Interior, Higher Education, Training and Employment, Industry and Com-merce, Planning and Regional Development, Investment and International Cooperation, and Fi-nance. We also target the deputy prime minister for anti-corruption, and the constituent assem-bly’s legislative committees on the economy. We intend for the policy recommendations to be implemented before the next legislative elections, expected in mid-2013.

2 Duncan Pickard, “Challenges to legitimate governance in post-revolution Tunisia,” Journal of North African Studies 16.4 (December 2011), pp. 637–652.

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Literature Review The pre-revolution literature on Tunisian political economy grounds our analysis. Political scien-tist Eva Bellin in her 2002 book argues that the Ben Ali government “embraced a strategy of state-sponsored industrialization” that contributed to the private sector’s “ambivalence toward democracy.”3 She describes the hazards of state-led growth and the method of central planning employed by the Ben Ali government, particularly in the labor market. In one stark example, she describes how the laborers’ and business leaders’ unions would bargain collectively every year for salaries across nearly all professions.4 Melani Cammett further identifies complacency among Tunisian industrialists when faced with the opportunity to lobby the government to support the development of local economic capabili-ties. The government monopolized industrial planning, and business leaders did not bother to even offer their input.5 We build on Bellin and Cammett to argue that the market disruptions caused by government in-terferences constitute the binding constraint to economic growth in Tunisia. We apply a rigorous econometric and qualitative methodology to update and expand Bellin. We also account for economic analyses published since Ben Ali’s fall. In this section, we review papers on the post-revolution economy, identify a gap in the recent literature, and describe the method we employed to fill that gap. Recent economic analyses Several recent reports posit sweeping macroeconomic analyses and policy recommendations. This review covers four of them. The International Labor Organization (ILO) released a report in March 2011 with the goal of improving the low labor-force participation among women, young college graduates, and rela-tively uneducated workers in the interior governorates. The report states that domestic and for-eign investment has been confined to “low-risk, technologically simple products,” and that the challenge moving forward is to “address the lack of good jobs.”6 The ILO recommends:

• Unlocking Tunisia’s investment potential by strengthening the fight against corruption encouraging financial market development, and relaxing barriers to investment;

• Developing a coherent national policy to strengthen the links between education, innova-tion, and the economy;

• Improving job quality through pro-worker reforms to the labor code.

3 Eva Bellin, Stalled Democracy: Capital, Labor, and the Paradox of State-Sponsored Development (Ithaca, New York: Cornell University Press, 2002), pp. 5–6. 4 Bellin, Stalled Democracy, p. 87. 5 Melani Cammett, Globalization and Business Politics in Arab North Africa (New York: Cambridge University Press, 2007), p. 116. 6 “Tunisia: A New Social Contract for Fair and Equitable Growth,” International Labor Organization, 11 March 2011, pp. 5–6.

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The report references the HRV method in its section on spurring private-sector growth when it argues that challenges to investment stem both from low returns to economic activity and the high cost of finance, the two branches at the top of the HRV growth diagnostics tree.7 Our report will build from the work of the ILO and HRV to make a more specific conclusion about whether the binding constraint pertains to the supply side of investment and growth (finance) or the de-mand side (returns). Maria Cristina Paciello of Mediterranean Prospects, in a technical report funded by the European Union, outlines some of the unhealthy economic trends from the Ben Ali era that the new gov-ernment will have to reckon with. These include high youth unemployment, regional disparities, the erosion of the middle class, and widespread official corruption. Paciello also summarizes transitional governance authorities and political parties.8 The African Development Bank (AfDB) report, “The Revolution in Tunisia: Economic Challeng-es and Prospects,” from March 2011, describes key macroeconomic priorities for Tunisia. It fo-cuses on youth graduate employment, regional disparities, governance and corruption, and secu-rity-sector reform. It also describes recent macroeconomic trends, including the stagnant growth in foreign direct investment (FDI) and increases in the current account deficit. The report con-cludes that the revolution holds great promise for the economy, but the fragility of the political situation could inhibit investment. Lachen Achy of the Carnegie Endowment for International Peace, in a report entitled “Tunisia’s Economic Challenges,” identifies four main problems: high rates of youth unemployment, a large number of marginal jobs, increasing income inequality, and substantial regional disparities. To address these challenges, Achy recommends policies that will lower barriers to private-sector in-vestment, match demand and supply in the labor market, redistribute wealth through the tax code, and promote regional development.9 In spring 2012, InfoDev and the World Bank will release a report by Zack Brisson and Kate Kon-tiris called “Tunisia: From Revolutions to Institutions.” It explores opportunities and challenges in four areas: regional disparity, small- and medium-sized enterprises, higher education, and po-litical participation. Also in the spring, International Crisis Group will release a paper on the Tu-nisian economy, and the U.S. Institute of Peace will publish a report on security-sector reform. Summary of literature The reports reviewed here provide important context for the current policy debate around the road forward for political and economic reform in Tunisia. They consistently point to regional disparities, youth graduate unemployment, the legacy of corruption, and the disequilibrium in the labor market as the key challenges facing the Tunisian economy. 7 “Tunisia: A New Social Contract,” International Labor Organization, 50. 8 Maria Cristina Paciello, “Tunisia: Changes and Challenges of Political Transition,” Mediterranean Prospects, Technical Report 3 (May 2011). 9 Lachen Achy, “Tunisia’s Economic Challenges,” Carnegie Endowment for International Peace, December 2011.

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None of the current reports, however, employ a rigorous constraints analysis and do not attempt to distinguish between symptoms and causes of Tunisia’s stagnant growth. Policies pursued in response to such findings could result in a tremendous loss of political and financial resources if they address the cosmetic and not the structural problems in the Tunisian economy. There is a need to identify Tunisia’s binding constraint and to recommend short-term, high-impact policy goals that can work to overcome that constraint. The growth diagnostics method To this end, we have applied the HRV growth-diagnostic method to Tunisia. The method is the product of several articles, the most comprehensive being “Doing Growth Diagnostics in Prac-tice: A ‘Mindbook.’”10 The HRV method challenges conventional wisdom among development practitioners that a shortfall in one growth indicator (such as poor infrastructure) can be compensated by strengths in another factor (such as robust financial markets). The HRV method is based on the premise that “determinants to [economic] growth are complements rather than substitutes.”11 HRV argue that while a country might have many development needs, certain shortfalls act as a binding con-straint to economic growth and serve as a target where aid will have the most powerful effect per dollar. HRV define the challenge to promoting growth in developing countries is to inspire entrepre-neurship and investment. The HRV method employs a decision tree to identify the binding con-straint to growth. The first branch asks whether growth is constrained most by the low supply of finance or by the low demand for finance, or low returns to economic activity. HRV provide four characteristics of the binding constraint that are tested at each subsequent branch against a bas-ket of reference countries. The tree leads to the growth indicator with all four characteristics, which thus constitutes the binding constraint. The four characteristics are:

1. High shadow prices of economic inputs. For example, if the average cost per container-kilometer by road is abnormally high compared to the reference basket of countries. This fact would provide evidence that poor infrastructure might be a constraint to growth.

2. Past constraint relaxations associated with an increase in economic activity, such as GDP per capita or net job growth.

3. Firms’ attempts to bypass the binding constraint. If the tax regime binds growth, then there should be abnormally high rates of informal employment.

4. Most and least successful firms should have similar respective features. HRV call this the camels and hippos test. In the desert, camels thrive because they have a low reliance on water, while hippopotami are nonexistent because they require water. Constrained firms will look like hippos in the desert.

10 Ricardo Hausmann, Bailey Klinger, Rodrigo Wagner, “Doing Growth Diagnostics in Practice: A ‘Mindbook,’” Working Paper 177 (September 2008), Center for International Development, Harvard University. 11 Hausmann, et al., “Doing Growth Diagnostics.”

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Critiques of the HRV method in Tunisia We have two chief concerns about the HRV method’s applicability to Tunisia. First, the HRV method might be poorly suited to a country like Tunisia that has experienced an epochal shift in its political economy. The method requires an analysis of trends over time and examination of ways that the private sector has adapted to or circumvented the binding constraint. In applying the HRV method to a country emerging from revolution, there might well be constraints to growth that do not yet register, or the revolution might have relaxed prior constraints. Given the HRV method’s emphasis on trend analysis, this report might identify the binding con-straint in the Ben Ali economy but not necessarily the binding constraint of the post-revolution economy. That said, better understanding the Ben Ali–era constraints has value. The challenge to the current government is to undo the damage done by the dictatorship to chart a pro-growth course for Tunisia. Our police recommendations are relevant to the current political economy. Second, the method focuses on total growth and not equitable growth, which is an explicit goal of the African Development Bank. We have addressed this by recommending policy options that can simultaneously overcome the binding constraint and explicitly benefit the interior regions. This second critique is also a feature. The HRV method’s focus on total growth allows analysts to separate causes from symptoms of subpar growth. The binding constraint implies that develop-ment aid will be wasted if it is spent on interventions to improve economic indicators that might be suboptimal but not binding. The method allows policymakers to identify policy interventions designed to have high-impact ripple effects across the economy. Foundations of the analysis Hausmann laid a foundation for the growth diagnostic in a September 2011 working paper. In particular, he evaluates Tunisia’s economic complexity and position in the product space. He measures a country’s economic complexity across two variables: diversification of economy (the number of products it makes) and ubiquity of product (number of countries that made the same products). Hausmann reports that Tunisia’s economy is remarkably strong considering its small size; Tunisia’s export basket shows the lowest ubiquity in the Maghreb, and Tunisia’s economy is as diverse as Egypt’s despite its having one-sixth the population size. Hausmann also shows that Tunisia has lower-than-average economic complexity for its GDP per capita. Hidalgo and Hausmann (2009) show that this position can indicate strong future growth since the economy can expand more strategically. This suggests that Tunisia will exhibit higher than average growth as it converges on the trendline in Error! Reference source not found..12 Hausmann uses the product space — a visual representation of the classifications of all products made around the world in terms of the productive capabilities required to produce them — to identify strategic possibilities for movement in the Tunisian economy. The product space allows 12 Ricardo Hausmann, “Structural transformation in Egypt, Morocco and Tunisia: A comparison with China, South Korea and Thailand,” unpublished working paper, September 2011, p. 12.

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analysts to predict which industries might be successful given a country’s current export portfo-lio. The strategic value of a particular jump to a new product is measured across two criteria: dis-tance between the product and the economy’s current capabilities, and sophistication, an indica-tor of the benefit of that product to future growth and measured by the weighted average of the GDP per capita of the countries with a comparative advantage in that product.

Hausmann’s analysis of Tunisia’s position in the product space reveals the strategic value of spurring investment in several product communities. He identifies garments as the closest com-munity, but its sophistication is below average for the country. More sophisticated products in-clude construction materials, petrochemicals, miscellaneous chemicals, home and office prod-ucts, and machinery. These, however, are at respectively increasing distance.13 Hausmann’s work on structural transformation informs our constraints analysis. We return to his discussion below.

13 Hausmann, “Structural transformation,” pp. 28–29.

Figure 2. Economic complexity and GDP/capita, 2008.

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Constraints Analysis The Tunisian economy demonstrates strong performance across a variety of growth indicators that mask underlying problems that at least in part fueled the 2010–2011 revolution. When Ben Ali assumed the presidency in 1987, he implemented economic and social reforms that won in-ternational praise. A June 2010 report by the Boston Consulting Group named Tunisia one of eight “African lions” poised for outstanding growth. Tunisia earned the moniker due to its pillars of “political stability, rule of law, property rights, access to capital, and public investment in edu-cation, health, and social services.”14 Deeper analysis of the Tunisian economy, however, reveals several worrisome trends, including high youth unemployment, an unequal competitive landscape for businesses, and inequitable regional development. Our constraints analysis, which applies the HRV method, reveals that economic growth has been most constrained by an overly interventionist state, resulting in an inefficient microeconomic environment characterized by (1) distortions in the commercial and labor markets, (2) a stifling and inequitable tax regime, and (3) a lack of investor protections. These risks remain and have in some cases intensified since Ben Ali’s fall. Methodology The HRV method (Figure 3) calls for a series of econometric and benchmarking tests that indicate whether or not a particular factor constrains growth in Tunisia. We used two sets of comparator coun-tries. The first includes middle-income MENA countries: Morocco, Algeria, Egypt, and Jordan.15 The second consists of other lower middle-income country including South Africa, Ecuador, and the Dominican Republic. We chose comparator coun-tries based on similar levels of GDP per capita (PPP), average GDP growth in the last decade, population growth, population density, geographic size, education level, and life expectancy. The constraints analysis draws from quantitative data from a range of publically available data-bases, and from interviews with business leaders, academics, government officials, and laborers during December 2011 and February 2012. Questionable quantitative data The Ben Ali government’s notorious tendency to manipulate or hide economic data challenges the accuracy and comprehensiveness of our quantitative analysis. According to government offi-cials, the Ben Ali government distorted the reporting of economic data by keeping negative re-ports secret, threatening survey respondents, or simply changing numbers. In one account from a development-bank analyst, a governor requested an analysis of socioeconomic data for his gov- 14 “The African Challengers: Global Competitors Emerge from the Overlooked Continent,” Boston Consulting Group, 2010. 15 Libya is a rentier state and is an unhelpful comparator for Tunisia.

Figure 3. The HRV growth diagnostics tree. Problem: low levels of private

investment and entrepreneurship

Low return to economic activity

Low social returns

Poor geography

Low human capital

Bad infrastructure

Low appropriability

Government failures

Micro risks Macro risks

Market failures

Information externalities

Coordination externalities

High cost of finance

Bad international finance

Bad local finance

Low domestic saving

Poor intermediation

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ernorate, but upon seeing the poor results demanded that the bank destroy the report and the accompanying data. To compensate in some way for distortions in quantitative data, we supple-mented our quantitative work with interviewees to reveal inconsistencies and work toward truth. Officials in the current government have been discovering raw reports and data that had been suppressed or manipulated during the Ben Ali regime. The government has been releasing these reports and databases as they are discovered, and more are published almost daily through the National Statistics Institute (www.ins.nat.tn) and the deputy prime minister for anti-corruption (www.opendata.tn). Appendix B outlines some data that could be used to revise our analysis. Referenced figures appear in Appendix A. High cost of finance Comprehensive quantitative data on many key finance indicators is lacking past 1989 for Tunisia.16 Though it is difficult to build a com-plete picture of the Tunisian financial sector, the available macro-financial data, enterprise surveys, and commercial reports allow for a sufficiently robust constraints analysis. It is axiomatic in Tunisia that a weak financial sector constrains growth. In interviews and news articles, Tunisians complain that the Ben Ali regime forced local banks to approve large, risky loans at below-market interest rates to family members and cronies. Well-connected borrowers avoided repayment and the banks were denied recourse.17 As a result, the narrative goes, banks have been unable to provide affordable and sufficient credit to normal Tunisians for personal or small business loans. Our growth diagnostic reveals a different story. Despite some worrying signs, we conclude that neither access to finance nor financial intermediation binds Tunisia’s economy. International finance A country’s sovereign credit rating serves as a shadow price for access to international finance. Tunisia has enjoyed a consistently high credit rating: Standard and Poor’s gave it a BBB+ rating throughout the 2000s, the highest in the Maghreb. The rating was downgraded to BBB- following the revolution, but the decision to keep the rating at investment grade was a reflection of investor confidence in the government’s economic policy and health of its financial institutions.18 The 2011 World Economic Forum (WEF) Competitiveness Survey ranked Tunisia’s sovereign credit fifty-third globally, which is in line with its income level. FDI provides another positive indicator for Tunisia’s financial sector. On average, between 2000 and 2005, Tunisia received yearly FDI inflows equal to approximately 3.1 percent of GDP, peak-ing at 9 percent in 2006 (Figure 6). This is comparable to some of the world’s most advanced and 16 See Appendix B for a list of wanted data. 17 Mila Sanina, “WikiLeaks Cables Help Uncover What Made Tunisians Revolt,” PBS NewsHour, 25 January 2011. 18 “Tunisia Credit Rating Cut by S&P to BBB- After Regime Change,” Bloomberg, 16 March 2011.

Problem: low levels of private investment and entrepreneurship

Low return to economic activity

High cost of finance

Bad international finance

Bad local finance

Low domestic saving

Poor intermediation

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investment-friendly economies (Finland at 3.7 percent, China at 3.3 percent), and ahead of its neighbors (Morocco at 2.1 percent, MENA at 2 percent). Though the majority of FDI is directed toward energy and low-value manufacturing, the capital inflows indicate investor confidence.19 Domestic finance Some indicators of domestic finance are worrisome, but there is insufficient evidence that these concerns bind growth. Most worrisome is that Tunisian banks are saddled with abnormally high levels of nonperform-ing loans (NPLs). Thirteen percent of loan assets held by Tunisian banks were nonperforming in 2010, near the top of the comparator basket. Banks have been steadily reducing their NPL assets, however, and overall levels are down from 25 percent in 2000 (Figure 7). Some analysts claim that the Tunisian banking sector is diffuse and undercapitalized, given that there are 21 banks in a middle-income country of 10 million people. There is significant disparity in the banks’ performance; current NPL rates range from 6 to 34 percent, which is in large part a legacy of the lending demands of the Ben Ali regime.20 Domestic bank credit to the private sector is relatively low, though not abnormally so. Credit has hovered around 65 percent of GDP, while that figure for Morocco, Egypt, and Jordan ranges from 80 to 120 percent of GDP (Figure 8). Another concern for the Tunisian financial sector is the underdeveloped capital market. Tuni-sia’s public capital markets are not robust. The banking sector is the dominant source of financ-ing. Tunisian stock exchange market capitalization is only US$5.4 billion, less than one-tenth of the Moroccan exchange, behind the Zimbabwean exchange, and just ahead of Uganda (Figure 9). These data demonstrate clear room for improvement in the Tunisian financial sector. But access to domestic finance does not appear to bind growth for the following reasons. First, gross nation-al savings rates and interest rate spreads are in line with Tunisia’s level of development. If the fi-nancial sector were so inefficient as to be constraining, then the inefficiencies would be reflected in larger spreads (to make up the revenue shortfall), and in lower savings rates. In reality, the in-terest rate spread in 2011 was 4.9 percent (the fifty-ninth lowest in the world),21 and the gross na-tional savings rate was 20.99 percent, or 64 globally (Figure 10). Additionally, WEF enterprise survey results reveal broad satisfaction with the financial sector, as reflected by the metrics outlined in Figure 11. Tunisia’s legal rights index is abnormally low, but reflects a governance failure rather than a failure of the financial system. We take up this issue in later sections.

19 “Tunisia Development Policy Review 2010: Towards Innovation-Driven Growth,” Report No. 50847-TN (April 2010), World Bank. 20 “Tunisia: Year in Review 2011,” Oxford Business Review, 2011. 21 Global Competitiveness Report 2011-2012, World Economic Forum.

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Third, the Tunisian capital market shows signs of its catching up to its neighbors. The Tunindex, a capital-weighted index of equities on the Tunisian exchange, has climbed from 1119 in 2002 to 5113 at the end of 2010, an average annual increase of 21 percent.22 As a percentage of GDP, the market capitalization of listed companies has risen from less than 10 percent in 2005 to 24.12 percent in 2010.23 Between 2007 and 2010, trading volume tripled each consecutive year.24 In sum, we find that there are signs of inefficiencies in the financial sector, especially toward smaller, domestic-oriented firms. The data do not show that finance is the binding constraint. Returns to economic activity Social returns — infrastructure and geography Tunisia has a robust network of transportation, logistics, energy, and ICT infrastructure. Infrastructure is not the binding constraint. Tunisia has above-average levels of Internet connectivity and usage. The number of Internet users increased six-fold between 2003 and 2010, from 6 percent of the population to over 36 percent in 2010 (Figure 12). Despite some variation across regions, 99 percent of Tunisians have access to improved water sources. The country has a 99.5 percent electrification rate, and consumption and costs are at reasonable levels.25 Tunisia has a competitive advantage in export infrastructure. The cost of exporting per container is US$773, the thirty-fifth cheapest globally (Figure 13). Transportation infrastructure is also strong. Tunisia has eight major airports with a ninth under construction, six major seaports, and a dedicated coastal oil terminal. There are 2,000 km of rail, above average for Tunisia’s size and income level. Sixty-eight percent of all roads are paved, but according to a World Bank report, the road network is insufficiently small and accounts for a 0.2 percent loss in GDP.26 Social returns — human capital Some human-capital indicators are excellent, while others give cause for concern. Neither scarci-ty nor quality of human capital constrain Tunisia’s growth, but certain features of Tunisia’s hu-man-capital makeup are indicative of the binding constraint.

22 “Bourse des Valeurs Mobiliers de Tunis,” Bourse de Tunis, 2011. 23 World Development Indicators, World Bank. 24 “Tunisia,” Oxford Business Review. 25 Cesar Calderon, “Infrastructure and Growth in Africa,” Working Paper No. 4914 (April 2009), World Bank. 26 Calderon, “Infrastructure and Growth.”

Problem: low levels of private investment and entrepreneurship

Low return to economic activity

Low social returns

Poor geography

Low human capital

Bad infrastructure

Low appropriability

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Tunisia is at the peak of its demographic window of opportunity. Throughout the 1990s, there was a steep drop in the ratio of dependents to working-age population. Compared with its neigh-bors, Tunisia’s dependency ratio is the most pronounced (Figure 14). These data are supported by the age distribution, in which the bulk of the population is in their twenties and below (Figure 15). Additionally, the fertility rate has been in steady decline and remains the lowest among its neighbors (Figure 16). Tunisian educational achievement has skyrocketed since the early 1990s (Figure 17). The per-centage of Tunisians with no formal education is over 50 percent among the 60-plus-year-olds, but less than 18 percent for Tunisians under age 40. There has also been an increase in higher education, and today over 20 percent of Tunisians have been educated beyond high school. Women have benefited disproportionately from the gains in education (Figure 18). Over 75 per-cent of Tunisian women aged 60 and above have no formal education. On the other hand, only 10 percent of women between ages 25 and 29 have no formal education, and 30 percent have col-lege degrees. Other trends are worrisome. Despite record-high proportions of working-age Tunisians, their participation in the labor force has remained steady at around 48 percent, and has been the low-est in the region since the early 1990s (Figure 19). Female participation has risen by 25 percent since the 90s, but remains low at about 26 percent of the overall workforce, still below the MENA average (Figure 20). Unemployment is particularly high among youth, having remained above 30 percent for the last decade (Figure 21). Among the university educated, unemployment has shot up from 2 percent in 1994 to over 20 percent in 2009 (Figure 22). Among certain tertiary-educated groups, the un-employment rate is over 60 percent (Figure 23). The constraint does not appear to be access to or quality of education. In the World Economic Forum Competitiveness Index, Tunisia is ranked eleventh globally in higher education, ninth in math and science education, and eleventh in management. It is clear, however, that the Tunisian government has allocated a disproportionately high per-centage of the national budget toward higher education, without positive economic results. Pub-lic spending on education has steadily increased since the early 1990s, and by 2008 reached 7.4 percent of GDP — more than the average of OECD (5.8 percent) and MENA (5.3 percent) coun-tries (Figure 24). Private higher education is practically nonexistent. Only 1.1 percent of students are enrolled in private tertiary education, compared to the LMI average of 28 percent, 26 percent in MENA and 25 percent among OECD countries. Correspondingly, household contributions to higher educa-tion costs are disproportionately low: 6 percent, compared to an OECD average of 24 percent.27 27 Tahar Abdessalem, “Scope, relevance and challenges of financing higher education: The case of Tunisia,” UNESCO, 25 March 2011.

16

There are only two data points for Mincerian returns to higher education. In 1980 the return was 27 percent,28 and 10.3 percent in 2001.29 The implication is that there was an economic constraint to higher education (in terms of quality and access) in 1980, but the returns in 2001 are low and do not reveal excessively high demand or low supply. The data reveal an existing constraint around human capital. This is due not to a gap in quality or access, but rather a mismatch of skills and available jobs. Wage data by occupation supports this hypothesis. Real wages have risen most among professions requiring vocational skills, and fallen for jobs requiring a liberal arts university education (Figure 25). The jobs-skills mismatch is a consequence of the binding constraint, and is discussed in greater detail in the “Binding Con-straint” section below. Low appropriability — market failures — coordination and infor-mation externalities Coordination and information tests are meant to determine whether constrained growth results not from abnormally low supply or de-mand, but instead from a failure to successfully move into new indus-tries requiring similar capabilities, or develop the capabilities required to move into new industries. The HRV product-space model is helpful in interpreting a country’s acquisition of productive capabilities and movements into new industries. In the case of Tunisia, we observe that the economy is well posi-tioned for accelerated growth by expanding into higher value industries. We determine that co-ordination and information externalities do not pose a binding constraint to growth.30 Tunisia’s indicator of export sophistication (EXPY) in 2007 was 9.44, compared with a world av-erage of 9.26. It has the fourth-highest greatest export complexity in MENA, and forty-seventh-highest globally. Its sophistication ratio (logEXPY/logGDP) is 1.065, slightly low compared to the world mean of 1.075 and a mean of 1.08 within the reference basket. Across its products, Tunisia has a relatively high average open forest score (1873) versus the reference basket average of 1415. This is similar to Egypt’s (1734), above Morocco’s (1432), and far above Algeria’s (145). Tunisia has a slightly less sophisticated export base than other countries at its GDP level. Coun-tries tend to converge to the average level of GDP for their level of export sophistication, so the HRV model predicts that Tunisia experience below average growth in the coming years on its current trajectory, unless its export sophistication metrics improve. Tunisia’s export economy is relatively diverse, with significant exports in the oil and petrochemi-cals sectors, garments, electrical appliances and equipment, and agricultural products. Presently,

28 G. Psacharopoulos and H.A. Patrinos, “Returns to investment in education: A further update,” Working Paper 2881 (2002), World Bank. 29 “Dynamique de l’emploi et adéquation de la formation parmi les diplômés universitaires,” vol. 1, “Rapport sur l’insertion des diplômés de l’année 2004,” 2008, World Bank and Tunisian Ministry of Higher Education. 30 Analysis of Tunisia’s position in the product space was performed using data provided by Hausmann. See also: Hausmann, “Structural transformation.”

Problem: low levels of private investment and entrepreneurship

Low return to economic activity

Low social returns

Low appropriability

Government failures

Micro risks Macro risks

Market failures

Information externalities

Coordination externalities

High cost of finance

17

the export sectors that contribute most to the open forest are the manufacturing sectors in plas-tics, iron, and steel. These sectors have relatively low levels of sophistication, however. We thus looked at the goods that have the highest product sophistication (PRODY) values among the 10 export sectors that contribute most to an open forest score. These goods are:

• Auxiliary machinery and parts for textile machinery; • Vinyl polymers in primary forms; • Typewriter and similar ribbons, ink pads, etc.; and • Parts for electric motors and generators.

The implication is that these goods have the right combination of “open-forest” values (connect-ed to many goods not currently produced in Tunisia) and product sophistication, and thus repre-sent high opportunity sectors. Separately, exports with the highest strategic value31 are (global export value [US$ millions] in parentheses):

• Aldehyde, its cyclic polymers, paraformaldehyde (1,546) • Salts of inorganic acids, peroxoacids, except azides (522) • Esters of inorganic acids not otherwise specified, salts, derivatives (1,195) • Self-propelled rail/tramway vehicles (not locomotives) (3,680) • Woven fabric incorporating metal threads, not otherwise specified (35)

The three goods with the highest strategic value for Tunisia are part of the chemicals cluster. Though many of Tunisia’s top exports are chemical products, our results indicate that there is still a wide-open forest, of high sophistication, to be exploited around the chemicals cluster. In sum, Tunisia does not seem to be experiencing significant coordination or information exter-nalities. Although its export sophistication is slightly below average, it is well positioned in the product space to move into new industries and acquire new capabilities that will allow it to fur-ther diversify into higher-value tradable products. Low appropriability — government failures — macro risks Tunisia enjoys a stable and sound macroeconomic environment. Macro risks do not constitute a binding constraint on growth. Monetary policy. Despite its close economic and social ties to Europe, Tunisia was remarkably insulated from the 2008 financial crisis. GDP growth slowed by one percentage point and unemployment increased by 0.6 percent between 2008 and 2009, but by 2010 both were back to nor-mal rates. Tunisia’s resilience can be attributed to a history of sound fis-cal and monetary policy characterized by a stable current account balance; low levels of govern-ment debt and little foreign debt; and protections for export-oriented firms. The tourism sector,

31 Strategic value is measured by increase in open-forest value that would be achieved if Tunisia started to produce these goods.

Problem: low levels of private investment and entrepreneurship

Low return to economic activity

Low social returns

Low appropriability

Government failures

Micro risks Macro risks

Market failures

High cost of finance

18

representing 13 percent of GDP, recovered quickly because of its low-cost model. Inbound remit-tances, at 5 percent of GDP, remained stable throughout the crisis.32 Tunisia’s real exchange rate has been declining since the 1970s (Figure 26). The decline reflects the policy of the Central Bank of Tunisia (BCT) to keep exports competitive through two main channels. First, since 1992 the Tunisian dinar has been under a managed float, pegged against a basket of European currencies that reflect the country’s main trading partners. Secondly, the BCT has used monetary policy instruments to keep the real exchange rate low. The real purchasing power of the dinar has decreased by roughly 10 percent from 2006 to 2010, in line with the government’s focus on devaluating the currency. It experienced major fluctua-tions along the way, however, that sometimes set the dinar as much as 15 percent above its 2006 real exchange rate (RER). These fluctuations seem to trend roughly with the BCT’s efforts to curb inflation. Since the RER compares the purchasing power in dinar to the rest of the world, it sug-gests the effectiveness of devaluation may have been inconsistent in the global market. The RER fluctuations seem to have had little impact, however, on the steady decline in the nominal eu-ro/dinar exchange rate. Successful devaluation against the euro is more important to Tunisia than maintaining competitiveness with the rest of the world, since 74.2 percent of Tunisian ex-ports go to Europe (Figure 27). The balance of imports and exports would suggest that international currency flows do not have much effect on the money supply, although the constant current account deficit over several dec-ades may have a cumulative effect resulting in higher sovereign risk and subsequent currency de-preciation. While increasing competitiveness through controlled currency devaluation is a priority, mone-tary policy also aims to curb inflation. The government keeps monetary policy tight enough to restrain expansion and keep inflation under control. The BCT adjusts the benchmark money market interest rate only rarely. In September 2006, for example, the rate was raised from 5.0 to 5.25 percent to reduce inflationary pressures caused by high oil and commodity process and capital inflows. This was the first rate increase since 2003, and there have been no further moves through 2008. The BCT prefers to control inflation by absorbing liquidity and limiting credit by three methods: deposit auctions, open market operations, and reserve requirement adjustments. The reserve requirement was lifted from 1.5 to 3.5 percent in September 2006, to 5 percent in November 2007, and to 7.5 percent in April 2008. The government also manages inflation through price controls, including controls on over 30 percent of the goods in the basket used to calculate inflation. Fiscal policy. The overall current account balance shows that Tunisia has run a slight current account deficit for the last decade, ranging from 2 to 5 percent of GDP (Figure 28). This is in line with the government’s fiscal targets of restricting the general budget deficit to 3 percent of GDP to decrease vulnerability to shocks. Trade balance is the vast majority component of the current account balance. Tunisia maintains dependence on exports as an economic driver, with goods 32 “Tunisia: A New Social Contract,” International Labor Organization.

19

and services exports ranging from 45 to 60 percent of GDP over the last decade. Tunisia’s export-led economy is based on value added to intermediate goods. This results in a correspondingly high level of imports that trends with exports and keeps the net trade balance modest. Tunisia’s low current account volatility suggests strong fiscal discipline on the part of the gov-ernment. Tunisia’s deficit is financed on the domestic market, and counterbalanced by FDI. Trade policy. Tunisia’s GDP growth tracks closely with exports (Figure 29). Its export-oriented economy centers on apparel (US$4.05 billion), electrical equipment (US$2.42 billion), petroleum products (US$2.45 billion), and leather and hide products (US$679 million). The continually positive current account balance results from healthy monetary and fiscal poli-cies that have helped it weather the global economic crisis. Tunisia’s ranking as the most compet-itive economy in Africa and thirty-sixth globally is in part a reflection of such policies.33 Low appropriability — government failures — micro risks The binding constraint on the Tunisian economy consists of microe-conomic risks that limit appropriability of returns to investment and entrepreneurship. Political risk and civil unrest. The 2011 revolution toppled a corrupt government but also increased the political risk to the Tunisian econ-omy. The Ben Ali government was one of the region’s most stable. Kaufman’s Political System Stability Index in the fifty-second percen-tile for political stability and the seventieth percentile for government effectiveness. According to the WEF Competitiveness report, policy and government instability are among the least prob-lematic factors for doing business in Tunisia. Standard and Poor’s sovereign BBB+ rating for Tu-nisia was the highest in the Maghreb, reflecting investor confidence. Today, lawmakers in the nascent Tunisian government are struggling to keep its credit rating from falling to junk status. GDP growth in 2011 is expected to be close to zero, and the 2012 budget is likely to include at least a 6 percent deficit. Questions about the suitability of Tunisia’s investment climate could not come at a worse time than during Europe’s deepening financial cri-sis, especially since Europe buys over half of Tunisia’s exports. There is a perception among businesses that rule of law has deteriorated since the revolution. In the months following Ben Ali’s departure, strikes and civil demonstrations have emerged across the country. The protesters are often local unemployed villagers demanding jobs and additional financial support for the community, and have blocked entrances or otherwise impeded produc-tion at several commercial facilities. Whereas under Ben Ali the strikes and sit-ins would be for-cibly stopped, the new government has often failed to protect the rights of business owners.

33 Global Competitiveness Report 2008–2009, World Economic Forum.

Problem: low levels of private investment and entrepreneurship

Low return to economic activity

Low social returns

Low appropriability

Government failures

Micro risks Macro risks

Market failures

High cost of finance

20

The Jebali government is unwilling to deploy significant numbers of police officers to protect businesses affected by the demonstrations. As they look toward the upcoming elections, political leaders are careful to maintain a populist public image that portrays their faithfulness to the goals of the revolution. Deploying police to quell social unrest is an all-too-familiar event from the Ben Ali government, and such actions could be used as political capital against the current govern-ment in future parliamentary elections. Some executives are complaining that the instability is affecting their investment decisions in Tunisia, and indeed some firms have already closed their doors indefinitely. In December 2011, automotive parts manufacturer Yazaki Corporation decided to close its factory in Om Larayes, leaving 2,200 Tunisians without work. Yazaki executives noted that strikes at the plant were the main reason that drove the decision to shut down the plant.34 Regulatory environment and anti-competitive behaviors. The Tunisian economy also has suf-fered from an over-burdensome and opaque commercial tax environment. Tunisia’s total tax rate (TTR) under Ben Ali was 63 percent, compared with a MENA average of 40 percent (Figure 30). Additionally, Tunisia has restrictive labor regulations on employers, including mandatory sever-ance pay equal to 17 weeks of salary.35 These regulations have led to a large informal economy. Business owners often decide to operate outside the formal sector to the extent that they can, and include only a fraction of their actual workforce on the official payroll. This practice also influences the high unemployment and low labor force participation rates. Today, the informal economy in Tunisia represents an estimated 38 percent of GNP and 28 per-cent of GDP. Tax evasion was commonplace under the regime, as reflected by enterprise surveys and the growth of the informal sector.36 A comparison of enterprise surveys in 2005 and 2006 re-veal evidence double-digit percentage increases in anti-competitive behaviors (Figure 31). Taxes and labor market regulations were not applied uniformly. Instead, the regime used the high tax liabilities as a tool of blackmail against firms. In one example, a Ben Ali crony demanded to be made a stakeholder of a successful car dealership in Tunis. To decline the request would lead to an audit and an exorbitant tax bill that would bankrupt the business. In another case, in the early 2000s, a tour operator in the late received a call from a nephew of Ben Ali demanding a 50 percent equity stake in the business, without any cash investment. When the owner resisted, the nephew threatened to destroy the company’s physical assets. The nephew backed off only af-ter a lengthy legal battle and several violent encounters between security guards and hired thugs. This business owner was one of the few to resist the so-called “50-50 rule” with his health and business intact.

34 “On-Going Negotiations to Reopen Yazaki Factory in Southern Tunisia,” Tunisia Live, 30 December 2011. 35 Global Competitiveness Report 2010–2011, World Economic Forum. 36 F. Schneider, “Size and Measurement of the Informal Economy in 110 Countries Around the World,” July 2002.

21

With Ben Ali gone, many Tunisian business leaders hope that the days of expropriation and per-vasive anti-competitive behaviors are over. Government leaders claim that business climate re-forms are a key priority, but it remains to be seen whether there is sufficient political will to im-plement the necessary laws and enforcement mechanisms to ensure a fair competitive landscape. The binding constraint: microeconomic risks associated with an overly regulated com-mercial environment, labor market, and higher-education sector Tunisia has the syndrome of an over-burdening state whose policies create an environment of low appropriability on returns. There are ex-ante/ex-post limitations on the private returns for productive enterprise and a distorted education and labor market. These have constrained Tuni-sia’s economic development despite good infrastructure, steady growth, sound macroeconomic fiscal and monetary policy, a moderately healthy financial sector, and high-value position in the product space. In this summary, we review the evidence of these constraints and note why other possible constraints are non-binding. In doing so, we identify three primary distortions: the privilege of export-oriented firms over those targeting the domestic market, threats to property rights, and a mismatch of skills and jobs in the labor market. Commercial distortions, expropriation, and property rights Tunisia’s productive sector is largely controlled by the state. Historically, there was both a per-ception and reality that property rights will be undermined and that state-connected firms enjoy better access credit and insulation from tax- and labor-code enforcement. For firms not sheltered by the regime, taxes were overly burdensome, with a corporate tax rate of 63 percent compared with a 40 percent average in MENA countries. Taxes devastated the small and domestic-oriented firms, which were approximately 20 percent more likely to complain about the tax regime than export-oriented firms.37 Limits on private appropriability of returns stifle entrepreneurship. In a survey by the Global En-trepreneurship Monitor, Tunisians have the highest perception within MENA that entrepreneur-ship is a desirable career, but have the lowest perception in the region that entrepreneurial op-portunities exist for them in the next three years.38 Fear of expropriation, government cronyism, and the stiff burden of taxes and regulations minimize the incentive to take risk in exploring ap-pealing opportunities in the nearby product space. Under Ben Ali, successful property rights were threatened by expropriation or extortion by cro-nies of the regime. Those risks now seem to be replaced by a rule-of-law vacuum in the country that threatens firms paralyzed by social disruptions. We return to the economic impact of do-mestic instability in the policy options. Education and labor-market distortions Since the early 1990s, the Tunisian government has directed its young population into free higher education concentrated in liberal arts, rather than investing in high-value science, engineering,

37 Enterprise Survey 2006, Tunisian Institute for Competitiveness and Quantitative Studies. 38 Global Entrepreneurship Monitor Report 2011, GEM Consortium.

22

and technical fields. Spending on education, which is 20 percent of government expenditures and 7 percent of total GDP, is far above comparison countries. This spending is not delivering gradu-ates who have the skills needed in the marketplace, aggravating youth unemployment and the informal sector while still leaving businesses desperate for technically skilled labor. Rigid labor regulations, including the need for third party approval to dismiss a worker and limits on fixed term contracts, further hinder the mobility of labor. Wage change disparities show that high-end technical skills are in much higher demand than basic white-collar college graduate jobs, as ech-oed by enterprise survey data. In a less subsidized and distorted education market, students would generally invest in education that provided skills needed for future jobs. But with the burden of education costs borne by the state, students continue to pursue tertiary education that is not aligned with labor market needs. Further, the state control of the formal economy and limits on entrepreneurship create the ex-pectation that the government should be providing jobs to these new graduates, even though they do not have skills for new product opportunities. Across both education and entrepreneurship, the burdensome state impedes market responsiveness.

23

Four characteristics of micro risks that indicate the binding constraint!

High shadow prices • Tunisia’s TTR is abnormally high, due

to a rent-seeking regime as a means of compensating for large-scale tax eva-sion.!

• Is ranked in the bottom quartile (147) in “Doing Business” for investor pro-tection.!

• The INS enterprise survey reveals 10-percentage-point increases in the num-ber of businesses complaining of anti-competitive behaviors.!

Camels and hippos • Export-oriented firms were insulated

from expropriation risks. • The risk to property rights presented by

the rule-of-law vacuum has slowed production and forced some “hippo” firms like Yazaki to cease operations entirely.

Circumvention • The informal economy makes up 38

percent of GDP, and interviews suggest that it has steadily risen.

Impulse-response • In the mid-1990s, the Ben Ali regime

provided free and open higher educa-tion. This policy was associated with steady rises in youth and tertiary-educated unemployment rates.!

Growth diagnostic “heat map” Below appear the tests we conducted at each branch of the growth-diagnostic tree, with a color-coded “heat map” of results. Green indicates comparative advantage and no evidence of con-straint; yellow signals inconclusive or mediocre performance; and red represents poor indicators with evidence of constraint.

24

Figure 4. Growth diagnostic heat map. Shadow prices Impulse-response Circumvention Camels & hippos

Sovereign credit rating; FDI inflows as percentage of GDP

Growth in response to FDI flows; private consumption and capital formation vs. credit supply

Market capitalization growth compared to reference countries

No data

NPLs; gross national savings rate; interest rate spread; benchmark access to finance indicators

Domestic bank credit to private sector

Market capitalization rates; capital market returns

Sector performance against capital intensity

Infr

astr

uctu

re Access to electricity, water, and Internet; export and transport costs

No data No data No data

Hum

an ca

pita

l

Benchmark quality of education indicators; demographic window of opportunity

Changes in educational achievement against GDP growth; Mincerian returns to education; change in admissions policies associated with unemployment rates

Private higher education sector as substitute for public higher education; household spending on education

Unemployment rates by education level; wages by occupation and industry

Mon

etar

y Real exchange rate; money market interest rate

Reserve requirement against investment rates

No data No data

Fisc

al Budget deficit; external debt

Total tax rate and informal economy

No data No data

Trad

e

Costs of importing and exporting; current account balance

No data Increase/decrease in trade with existing export partners

Growth in non-tradeable vs. tradeable sectors

Mar

ket f

ailu

res

Exte

rnal

ities

Benchmark export sophistication and open forest scores; strategic value

No data No data No data

Polit

ical

ris

k

Sovereign credit rating; investor protection; anti-competitive behaviors

Civil unrest and firm closures

No data

Regs

. Benchmark labor regulations

No data Informal employment and distribution networks

Taxe

s Benchmark TTR No data Tax evasion trends

Offshore vs. onshore commercial sector performance, enterprise survey results

Fina

nce

Socia

l ret

urns

Mac

ro p

olic

y risk

sM

icro

risks

Int'l

fina

nce

Dom

estic

fin

ance

Retu

rns t

o ec

onom

ic ac

tivity

25

Policy Options The constraints analysis concludes that microeconomic risks associated with the Ben Ali regime’s over-involvement in the economy are the binding constraint to Tunisia’s economic growth. We find the strongest market disturbances in three areas: disequilibrium in the labor market, prefer-ence for export-oriented firms, and degradation of property rights. This section presents policy options to the Jebali government to overcome the damage done under Ben Ali. We recommend that the Tunisian government:

• Equilibrate supply and demand in the labor market by facilitating a private-sector-oriented higher education sector;

• Balance competitiveness in the domestic and export sectors; and • Reform the domestic security system.

1. Higher education and the labor market Since the early 1990s, the Tunisian government has been providing free or low-cost public higher education to almost any citizen wishing to enroll, regardless of academic performance or labor-market demands. Today, the labor market is grossly misaligned. Every year, over 70,000 new graduates spend an average of 18 months looking for their first full-time job. The following options are meant to reduce the distortions caused from two decades of disruptive higher-education policies, with the goal of improving Tunisia’s human capital and reducing un-employment and attracting higher-value industries that demand a knowledge economy. The Tu-nisian government should:

1A. Shift public education spending from the liberal arts to vocational training, sci-ence, and technology-related fields. The labor market demands university-educated Tunisians with technical training in sci-ence and engineering. Yet Tunisian universities continue to produce too many graduates in the liberal arts. The Tunisian government must address this mismatch. We recom-mend that the government redirect cost savings toward retraining programs, apprentice-ship stipends, or other initiatives meant to facilitate the alignment of skills to jobs. To mitigate public resistance, the government should sell this as a pro-jobs policy and not an under-investment in higher education. 1B. Expand capacity for science and engineering programs at qualified universities. The government should target its higher education investments toward expanding and improving its science and engineering programs. This can be done by growing its re-search facilities, seeking partnerships with science and technology companies, and devel-oping its network with research institutions in other countries.

1C. Strengthen ties between universities and local industries. In efficient labor markets, universities respond to the demands of industries in the re-gions they serve. Students are most likely to attend the university that is closest to home. Students can more easily engage in industry-related research, and professionals can en-

26

gage with students and professors on campus. Ties between universities and local indus-try are also important for industrial cluster development. Entrepreneurial innovation is best achieved when universities are closely linked to local industries, sharing research space and allowing for cross-pollination of ideas. Universities should receive incentives to stimulate interaction with nearby private-sector firms. Faculty could change curriculums to align with local industry, develop on-campus entrepreneurial incubators for students and recent graduates, and provide on-campus job training.

2. Balancing competitiveness in domestic and export sectors The domestic economy was constrained by the government’s policies that privileged export-oriented firms. The tax system in particular was skewed toward the export sector, largely to bene-fit the ruling family and its cronies. In post-revolution Tunisia, the tax code should keep Tunisia globally competitive, encourage businesses to return to the formal sector, and allow for domesti-cally focused firms to grow. The Tunisian government should:

2A. Lower the tax on profit, and evenly enforce taxes. Under the Ben Ali regime, the 63-percent total tax rate (TTR) was among the highest in Africa. The high TTR contributed to a large informal economy. The government should undertake a policy of lowering the overall tax on profit while strengthening enforcement of commercial tax receipts. Businesses should see the value of playing by the rules, through benefits of formalization and penalties for noncompliance. 2B. Explore areas to make up the potential shortfall in tax revenue. Tunisia presently has no capital gains tax and low or nonexistent taxes for export-oriented firms. The introduction of a small capital gains tax and a more balanced tax re-gime for domestic and export-oriented firms would increase tax revenue and help level the playing field for domestic firms.

3. Security-sector reform The expropriation risk that existed under Ben Ali constituted a threat to property rights. Alt-hough the new government has made impressive efforts to combat official corruption and elimi-nate expropriation, the threat to property rights remains in the form of a rule-of-law vacuum, exemplified by the protests and blocked production at factories in the south and interior. Failing to respond to challenges to the rule of law could compel business to shut down, following the ex-ample of the Yazaki Corporation. In order to reinforce the rule of law and protect property rights, the Tunisian government should:39

39 All our interviews on security-sector reform were with activists, analysts, and business leaders; we did not inter-view any security officials. As a result, our policy options are less specific than we would like, which is why our chief recommendation is that a study be undertaken to evaluate opportunities and challenges for security-sector reform.

27

3A. Strengthen the public’s trust in the national police.40 The public’s mistrust of the security apparatus remains one of the key challenges to rule-of-law reform. Many in the public link the domestic security services under the Ministry of Interior with corruption, political detainment, and brutal interrogations.41 Rebuilding trust in the national police will take time, but the institutions under which that change can take place should be established now. The government should continue its evaluation of the security apparatus and develop a strategic plan under the authority of the deputy minister of interior for police reform, appointed in February 2012. We do not have enough data about the interior ministry to make specific recommenda-tions for its reform. But historical cases of police reform in Eastern Europe and South Af-rica and interviews with other government officials suggest that the deputy minister should consider:

• Establishing a separate intelligence agency outside the authority of the Minister of Interior, getting the police out of the business of intelligence gathering;

• Improving the police department’s ability to collect forensic evidence by purchas-ing equipment and training officers, instead of relying solely on interrogations for evidence-gathering;

• Rooting out corruption in the police department in an effort coordinated by the deputy prime minister for fighting corruption; and

• Launching a public-relations campaign to advertise progress on these and similar programs.

3B. Improve government-police relations. As a necessary condition for security reform, the government must improve the two-way mistrust between the ministers and the police. Human-rights activists have described the relationship between the Ali Laarayedh, the minister of interior, and the leaders of the se-curity forces as “a war.” Laarayedh is a member of Ennahdha and a former political pris-oner. The forces under him are longtime members of the security apparatus who have not reacted well to policies that would curb the authority granted them under the Ben Ali re-gime. The government of interim prime minister Beji Caid Sebsi forbade the police from organizing a national union. Other police officers have gone on strike over low wages and corruption; the standard hourly wage for a police officer on night shift in Tunisia is 1,000 millimes, or about seven U.S. cents. Police striking in Gafsa also accused the department of “financial and structural corruption” and demanded reform.42 Wages are so low in part because police under Ben Ali supplemented meager incomes by extracting bribes. The curtailment of both job responsibility and real income constitutes

40 For more on the domestic security apparatus, including policy recommendations, see Querine Hanlon, “Prospects for Security Sector Reform in Tunisia: A Year After the Jasmine Revolution,” U.S. Institute of Peace, forthcoming spring 2012. 41 Tahar Ben Youssef, Les Snipers dans la Révolution tunisienne et la Réforme de Systeme sécuritaire, Tunis 2011. 42 “Police Protest Low Wages, Corruption in Gafsa,” Tunisia Live, 14 November 2011.

28

an assault on the dignity of Tunisian police and a diminished likelihood that they will fol-low directives of the government unless conditions improve. The government should in-crease pay for Tunisians to make up for the loss in bribe money that the Tunisian police came to rely on. Prime Minister Jebali should also find ways to include police leadership at the national and governorate level into policymaking conversations, such as by asking the chief of police to join his cabinet or help develop the new security agency.

3C. Decentralize the security apparatus. Tunisian governors have had trouble mobilizing security units to enforce their directives. In one factory demonstration in the south, the governor ordered the police to break up the protests, but the local commander held off on the order until confirmation could come from Tunis. Word never came, and the protests continued. The governor requested additional support from the military, but the generals elected to keep their soldiers in the barracks.43 Governors must be empowered to respond more quickly to pressing needs and violations of the rule of law. The minister of interior should empower his subordinates in the gover-norates to make more decisions about police operations, especially when called on by governors.

Equitable growth The HRV method is not designed to identify policy prescriptions for equitable growth, a key pri-ority of the African Development Bank and other donors. Our policy recommendations, howev-er, work toward this goal. Increased vocational training and leveling the playing field for domes-tic and export-oriented firms would disproportionately benefit the interior regions. Security-sector reform (SSR), too, would quell civil unrest in rural areas. Equitable-growth strategies will undoubtedly focus on regional development, which we conclude is a symptom and not a cause of the binding constraint. International aid that nonetheless pro-motes regional development should incorporate these policy options, especially the first and se-cond, in an effort to work toward alleviating both poverty and the binding constraint.

43 Interview with business executive, Tunis, December 2011.

29

Implementation Plan Some policy options will be easier to enact than others. This section suggests talking points, pri-orities in implementation, and synergies between policies to facilitate implementation. Figure 5 summarizes the implementation challenges and the suggested steps to overcome them. 1. Higher education and the labor market

A. Shift public spending from the liberal arts to vocational training, science, and technology; B. Expand capacity for science and engineering programs at qualified universities; and C. Strengthen ties between universities and local industries.

Tunisians value highly their nearly unrestricted access to free higher education. Attending college has become a comfortable alternative for many unemployed youth, and it is easier and cheaper for public universities to accept more liberal-arts students than it is students in science, technolo-gy, and engineering. Furthermore, because vocational programs are sparse, Tunisian youth who seek to further their education have little choice but to study the liberal arts. Shifting money away from liberal-arts programs and into science, technology, and vocational programs must be sold as a strategy to create meaningful jobs in the economy and increase stu-dents’ employability. Creating a public-relations campaign around this point will be easy consid-ering the number of business leaders who are disappointed by the number of qualified applicants they see when they are looking to hire an engineer. The shift in spending will garner little support if it is seen to infringe on Tunisians’ access to higher education in any significant way. Options B and C should be implemented first. They are the most likely to garner broad public support and generate visible returns. Option A will facilitate B and C when it becomes politically prudent to do so. 2. Balancing competitiveness in domestic and export sectors

A. Lower the tax on profit, and evenly enforce taxes; and B. Explore areas to make up the potential shortfall in tax revenue.

Option A is essential for creating a competitive balance between domestic- and export-oriented firms. Option B will compensate for ineffective implementation of A, helping to ensure that a new tax code will not generate a large fiscal shortfall. Determining exactly where tax rates should lie and the deadweight losses that they will incur will require robust demand studies. The main challenge in implementing these options will be to build investors’ interests in an ex-port-driven economy while increasing the tax burden on export-oriented firms. The policies should be sold as a strategy for building long-term economic sustainability in the country and incubating future export industries in the domestic market. Domestic industries are the founda-tion of any economy, including big exporters. The world’s largest firms originally targeted a do-mestic market and then build export capacity. And Tunisia’s domestic market, with high human capital and good infrastructure, is fertile ground for entrepreneurship.

30

Building investor interest in Tunisia will require that tax reform be implemented in conjunction without other reforms in governance. The government must increase transparency, continue the fight against corruption, and pursue other measures that investors like to see. Ben Ali attracted multinational corporations despite his dictatorial authority because foreign investors knew what to expect and that they would be treated well. Ben Ali knew that foreigners would not invest un-less they were certain about the rules and their enforcement. The new government must main-tain this commitment to transparency, clarity, and even enforcement. 3. Security-sector reform

A. Build the public’s trust in the national police; B. Improve government-police relations; and C. Decentralize the security apparatus.

Plans for security-sector reform must operate on a multiyear timeframe, but the institutions that will implement those reforms must be set up now. Option B is the first step toward creating these institutions. The security apparatus must be aligned under the government to build the capacity for strategic planning and implementation over the current and future cabinets. Once trust is build between the government and the security apparatus, then policies be implemented to work toward option A. Option C would strengthen A, but it would complicate B since the central gov-ernment would need to coordinate its efforts across ministry headquarters in Tunis as well as all 27 governorates. Option C, therefore, should not be implemented until significant trust has al-ready been building between the government and the security apparatus. The largest implementation challenge will be to ensure police buy-in for policies that limit the autonomy that they enjoyed under Ben Ali. The government should sell the policy reforms as a way for the police to build respect for themselves in broader society. The police are currently despised while the military is held in high regard. The police should be convinced that they would be more respected if they win the public’s trust. That, coupled with higher wages and more robust labor rights for police, could convince them that giving up some of their authority and improving their public image could bolster their status in society.

31

Figure 5. Summary of recommendations and implementation plan.

IMPL

EMEN

TATI

ON

STRA

TEG

Y

* — ty

pe o

f main

impl

emen

tatio

n ch

allen

ge: P

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oliti

cal;

L =

legal;

F =

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; O =

org

aniza

tiona

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gree

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CPR;

red

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white

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A.

Prop

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rs An

alys

is Su

gges

ted A

ction

s

Cat.

Polic

y Opt

ion

Chal

lenge

s Ty

pe*

Seve

rity*

* St

eps

Lead

†

Education and the labor market

Shift

spen

ding

from

libe

ral

arts

to vo

catio

nal,

scien

ce,

and

tech

nolo

gy tr

ainin

g

• Cu

rtaili

ng th

e exp

ecta

tion

of fr

ee, o

pen

liber

al ar

ts ed

ucat

ion

F/P

Se

ll pl

an as

a sh

ift to

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-jo

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ion

Train

ing a

nd

Empl

oym

ent

Expa

nd sc

ience

and

tech

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gy tr

ainin

g cap

acity

•

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• W

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artn

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univ

ersit

ies

Hig

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nk re

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ng

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Hig

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Balancing competition

Lowe

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tic

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e tax

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s •

Stre

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lectio

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frastr

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re

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F

Sell a

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SMEs

Fi

nanc

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Security sector and the rule of law

Dec

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En

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Build

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•

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rior,

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ry

32

Appendix A: Figures Figure 6. FDI inflows, 2000–2008.

Figure 7. Nonperforming loans, 2002–2011.

33

Figure 8. Domestic credit provided by banking sector, 2000–2010.

Figure 9. Market capitalization, 2000–2010.

34

Figure 10. Gross domestic savings, 2000–2010.

Figure 11. Firm satisfaction. Question Raw score World rank/142 Availability of financial services 4.5 70 Affordability of financial services 4.3 60 Financing through local equity market 4.4 26 Ease of access to loans 3.0 51 Venture-capital availability 3.1 35 Soundness of banks 5.0 84 Regulations of security exchange 4.5 51 Legal rights index (legal protections of borrowers) 3.0 105 Source: WEF Enterprise Survey.

35

Figure 12. Internet users, 2000–2010.

Figure 13. Costs of exporting and importing.

36

Figure 14. Age dependency ration, 2000–2010.

Figure 15. Age distribution, 2010.

0.0

2.0

4.0

6.0

8.1

Den

sity

0-4 5-910

-14015

-1920

-2425

-2930

-3435

-3940

-4445

-4950

-5455

-5960

-6465

-6970

-7475

-79 80+

Age cohort

Age Distribution, Tunisia 2010

!Source: 2010 Employment Survey, Tunisian Statistical Institute. !

37

Figure 16. Fertility rates, 2000–2009.

Figure 17. Educational achievement by age cohort, 2010.

0.2

.4.6

.81

0-4 5-910

-1415

-1920

-2425

-2930

-3435

-3940

-4445

-4950

-5455

-5960

-6465

-6970

-7475

-79 80+

Educational Achievement by Age Cohort, Tunisia 2010

No formal educ. PrimarySecondary UniversityNot reported

!Source: 2010 Employment Survey, Tunisian Statistical Institute.

38

Figure 18. Educational achievement by age cohort and gender, 2010. 0

.2.4

.6.8

1

Males Females

0-4 5-910

-1415

-1920

-2425

-2930

-3435

-3940

-4445

-4950

-5455

-5960

-6465

-6970

-7475

-79 80+ 0-4 5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79 80

+

Educational Achievement by Age Cohort and Gender

No formal educ. PrimarySecondary UniversityNot reported

!Source: 2010 Employment Survey, Tunisian Statistical Institute. Figure 19. Labor force participation, 2000–2009.

39

Figure 20. Female labor force participation, 2000–2009.

Figure 21. Unemployment rates by age cohort, 2005–2009.

40

Figure 22. Unemployment rates by education level, 2005–2009.

Figure 23. Job seeking by education level, 2010.

Education Level Looking for Work? Column1 Yes No High School 21.9% 78.1% High School equivalent 24.5% 75.5% Technical degree 58.5% 41.5% Master of Arts & Letters 62.1% 37.9% Master Economics 63.9% 36.1% Master Science 62.9% 37.1% Other Master 44.8% 55.2% Bachelor Eng. 39.1% 60.9% Pharm Med. 45.4% 54.6% Law 43.3% 56.7% PhD 27.4% 72.6% Tech. degree 1 41.5% 58.5% Tech. degree 2 49.4% 50.6% Tech. degree 3 52.8% 47.2% Other Bachelor 36.0% 64.0%

Source: 2010 Employment Survey, Tunisian Statistical Institute.

41

Figure 24. Public spending on education, 2010. Public spending on education Higher education spend-

ing as % of GDP As percentage of GDP

As percentage of budget

Tunisia 7.4 23.4 2.0

OECD average 5.8 12.6 1.4

Lower middle income (LMI) countries average

5.3 15.3 1.0

Figure 25. Average wage changes, 1987–1997.

Source: NBER Wages of the World dataset, 1998.

42

Figure 26. Exchange rates, 2006–2010.

Source: IMF Tunisia Country Report, 2010. Figure 27. Economic dependence, 2010.

43

Figure 28. Current account balance, 2000–2008. -5-5

-500

055

5Current-account balance (% of GDP)___EIUCu

rren

t-ac

coun

t ba

lanc

e (%

of G

DP)_

__EI

UCurrent-account balance (% of GDP)___EIU2000

2000

20002002

2002

20022004

2004

20042006

2006

20062008

2008

2008year

year

yearTunisia

Tunisia

TunisiaMorocco

Morocco

MoroccoEgypt

Egypt

EgyptSouth Africa

South Africa

South AfricaEcuador

Ecuador

EcuadorDominican Republic

Dominican Republic

Dominican RepublicEIU 2008

EIU 2008

EIU 2008Current Account Balance (as % of GDP)Current Account Balance (as % of GDP)

Current Account Balance (as % of GDP)

Figure 29. Export and GDP growth in Tunisia, 1990–2010. -5

-5

-50

0

05

5

510

10

1015

15

151990

1990

19901995

1995

19952000

2000

20002005

2005

20052010

2010

2010year

year

yearExports of goods and services (annual % growth)

Exports of goods and services (annual % growth)

Exports of goods and services (annual % growth)GDP growth (annual %)

GDP growth (annual %)

GDP growth (annual %)World Bank 2009

World Bank 2009

World Bank 2009Export Growth and GDP Growth in TunisiaExport Growth and GDP Growth in Tunisia

Export Growth and GDP Growth in Tunisia

44

Figure 30. Total tax rates in the African Union.

!Source: PriceWaterhouseCoopers: http://www.pwc.com/gx/en/paying-taxes/pdf/paying-taxes-2011.pdf.

45

Figure 31. Anti-competitive behaviors, 2005–2006.

46

Appendix B: Wanted Data & Further Research There is much missing data that would contribute to our analysis. These data are absent because they are not available, we did not have to collect them, or we did not find them despite our best efforts. This section lists some of the data that would be helpful if found, and what they would indicate. Qualitative data We did not have time to conduct all the interviews we would have liked to. If given more time, we would speak with the following contacts:

• A car importer to better understand the distinction between domestic and export-oriented firms;

• A notary from the Ben Ali era who defended clients against expropriation; • The manager of the Yazaki corporation’s remaining plant in Gafsa to understand why the

company shut down its nearby Om Larayes plant; • A lettuce farmer in Gafsa who exports to Europe to better understand the prospects for

Tunisian agribusiness; and • A labor activist in Gafsa to better understand the demands of striking workers.

Quantitative data Quantitative data from the Ben Ali era is hard to come by and often manipulated. The new gov-ernment has been releasing datasets that they have uncovered while combing through the files of the old government. Some of these datasets are available through the National Statistics Institute (INS). The coordinator for international cooperation at the INS told us that he plans to release more data by the end of summer 2012. We expect that more data will be posted on the new open government portal, http://opendata.tn/. Wage data could be helpful in measuring how supply or demand for certain occupations has shifted over the years. Of particular help would be median wages by occupation, as found in the Occupational Wages around the World (OWW) dataset. There are many holes in the data for Tunisia, and no data past 1997. Any new wage data must be scrutinized carefully since wages since union negotiations often determined wages, meaning that they would not be subjected to a free labor market. Financial data would also be helpful, especially banking data. The World Bank and Economist datasets do not have any yearly banking data for Tunisia, such as:

• Bank capital to assets ratio; • Bank liquid reserves to assets ratio; • NPLs to total gross loans; • Total commercial bank lending amounts; • Domestic credit provided by the banking sector as percentage of GDP; • Lending interest rate; and • Interest rate spreads.

47

More data on NPLs would help us evaluate the financial sector. NPL rates must be put in context to avoid mistaken conclusions. For example, the NPL rate might be misleadingly low if banks recently made a large number of loans. There might be a lag in those loans appearing in the NPL numbers, even if they are bad. A high NPL rate would also be less worrisome if the banks hold a lot of deposits, demand a high amount of collateral, or if they charge high interest rates. The stock-market valuation of publically traded banks could be telling. If their market valuation is higher than the auditors’ valuations (the banks are “above book”), then investors are optimis-tic. Optimism can also be measured by the percentage of bank deposits and stocks held by for-eigners. Analysis based on public trading in Tunisia must be qualified by the country’s small market capitalization, but it could give some insight into the financial picture. A comparison of loan disbursements with GDP growth over time could also be helpful in as-sessing Tunisia’s financial health. If GDP growth outpaces or does not track with loan growth, then financing is coming from somewhere else and could signal circumvention of a binding con-straint. If loans and GDP track, then finance is likely not constraining. Suggestions for further research In addition to building the missing quantitative and qualitative data, further work could be done on import subsidies and their market distortions. We heard anecdotal evidence that universal import subsidies, especially on food, that were granted as social-justice measures squeezed do-mestic food producers out of the market. We did not collect data to substantiate the anecdote. More work could also be done on the specific mechanisms by which the tax code favored export-oriented firms. Such an analysis could help the current government reform its tax code to be more market-friendly. We were unable to collect on the internal politics of the security sector. Research in this area could reveal a more specific strategy for reform. Without access to top security officials, a com-parative approach could prove useful in generating policy options.

48

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