Editor’s Note: Since 2011, the countries of the Middle East and North Africa have experienced a period of economic and political turmoil—the Arab Spring—that holds both great promise and great risk. Such a widespread uprising against autocratic rule will have many diverse causes. What began as a protest by a street vendor against, in part, excessive economic regulation in Tunisia has become a wide-ranging movement challenging entrenched political, economic, cultural, and religious interests across an entire region. An empirical study presented in the 2012 Index by Dr. Nahid Anaraki used the techniques of econometric analysis to demonstrate that the motivation for violence in the region is likely to be less about conflict between Islam and Western values and more about revenge against corrupt regimes. This chapter deepens that analysis, looking specifically at the role that cronyism and corruption played in the Tunisian uprising while identifying ongoing problems that must still be addressed if Tunisia is to achieve the full flowering of economic freedom and broad-based development that benefits everyone, not just a politically connected elite.
The Tunisian Revolution took the world by surprise in January 2011 and unleashed expectations of a transition toward liberal Western-style democracy in the Arab World. Much progress has been made in Tunisia over the past three years on the political front. A new constitution was adopted with a large consensus in January 2014, and the first democratic parliamentary and presidential elections under the new constitution were held in October–November 2014.
Nevertheless, deep-rooted deficiencies of the socioeconomic system have not yet been tackled. This system, characterized by privileges and cronyism at the expense of competition and performance, is at the root of the Arab Spring and still needs to change if the future of the Tunisian transition is to be secured.2
Tunisia’s economy was one of the best-performing in the region before 2011. Rapid poverty reduction was accompanied by significant improvements in the main human development indicators. On the basis of these achievements, Tunisia was heralded as a role model for other developing countries by the International Monetary Fund and the World Bank. Similarly, the World Economic Forum repeatedly ranked Tunisia as the most competitive economy in Africa.
As the revolution made clear, however, beyond the shiny façade often presented by the former regime, the Tunisian socioeconomic model was (and remains) deeply deficient. Unemployment has remained high, especially among young graduates, and regional disparities have persisted. At the root of these disappointing economic outcomes lies a policy infrastructure put in place during the presidency of Zine al-Abidine Ben Ali (April 1989–January 2011), which results in privileges for an elite few at the expense of those who lack significant political connections.3
Achieving stability in the region will require transitioning to an open economic system that brings greater economic opportunity.4 The key policy challenge, therefore, is to identify instruments that will ensure that such a transition is orderly, swift, and sustainable.
Cronyism, Corruption, and Social Exclusion in Tunisia
Tunisia’s economic development model has been predicated on an active role for the state since the 1960s. This model initially accelerated growth and rapid poverty reduction.5 However, interventionism became increasingly directed by the country’s elite for their own benefit. Over the past decade, extensive corruption and abuses were associated with the activities of the cronies and family of former president Ben Ali.6 Pervasive barriers to competition allowed underperforming firms to survive in spite of low productivity and created opportunities for rent-seeking by cronies of the regime. This evolution of Tunisia’s economy into a system of rents and privileges is at the root of its failure.
It is notoriously difficult to demonstrate clearly the impact of cronyism and predation on firms’ growth and characteristics because access to relevant data is usually difficult.7 In Tunisia, we were able to use information on 220 firms confiscated from President Ben Ali and his extended family (a total of 114 people) in the aftermath of the 2011 revolution and to compare their performance to that of all other firms in Tunisia.8
Firms confiscated from President Ben Ali’s extended family were important from an aggregate economic point of view. Although they account for less than 1 percent of all jobs, they pocketed a striking 21.3 percent of all net private-sector profits in Tunisia, equivalent to US$233 million in 2010, corresponding to over 0.5 percent of GDP. (See Chart 1.) Considering that we identify only firms with direct links to the Ben Ali family as opposed to all firms with cultivated connections, this number is probably best interpreted as a lower bound on the importance of political connections.
How could connected firms make so much money? The firms confiscated from President Ben Ali’s family were concentrated in sectors where profit margins are quite high and close relations with government counterparts is an important determinant of profitability, notably in the real estate and enterprise services sectors (59 firms); personnel services (20); transport (16); wholesale trade (15); automobile trade (11); construction (nine); financial services (eight); the food industry (seven); hotels and restaurants (seven); media activities (five).
Specifically, our analysis found that confiscated firms are more likely to operate in sectors subject to entry regulation. Approximately 40 percent of Ben Ali firms were in sectors subject to authorizations and restrictions on foreign direct investment (FDI).9 By comparison, authorization requirements apply to only 24 percent of all sectors in which Ben Ali firms are not present, while FDI restrictions apply to approximately 14 percent of sectors that are free of Ben Ali firms.10 (See Chart 2.) Thus, regulatory restrictions and connected firms go hand-in-hand.
The superior performance of Ben Ali firms is especially marked in densely regulated sectors (at the five-digit sector level). Restrictions on entry into these sectors were associated with greater market share and greater profits for the firms owned by Ben Ali’s extended family, who had privileged access. Ben Ali firms are especially more profitable than their peers in sectors that are subject to authorization and FDI restrictions; these regulations thus appear disproportionately to assist the profitability of Ben Ali firms. In sectors that are not subject to these restrictions, Ben Ali firms make significantly less profit than their competitors, which countermands the idea that Ben Ali family members were innately better entrepreneurs. (See Chart 3.)
Legislative changes introducing new entry restrictions were plausibly due to manipulation by the Ben Ali clan.11 First, the prevalence of FDI restrictions and authorization requirements was significantly higher in sectors in which Ben Ali firms were present when the Investment Incentives Code was approved in December 1993. Second, over time, new restrictions were introduced at a higher frequency in sectors in which Ben Ali firms had set up shop. 12 Sectors in which Ben Ali firms are active are two times more likely to be subjected to new authorization requirements than sectors in which they are not and five times more likely to be subjected to new FDI restrictions.13 (See Chart 4.) In sum, if existing regulations did not suffice to secure lucrative business deals, Ben Ali would use executive powers to change the legislation in his favor.
Tunisia’s investment policies thus did not serve only their purported objectives of creating jobs and stimulating investment. Instead, regulations often served the personal interests of those in power at the expense of providing fair opportunities to the vast majority of Tunisian entrepreneurs who lacked political connections.
Is Tunisia an isolated case? Unfortunately not: Our findings are consistent with a large body of literature showing that countries with more extensive business entry regulations tend to grow more slowly and to have higher levels of corruption.14 Across the globe, corruption and burdensome business regulation go hand-in-hand. (See Chart 5.)
In sum, our results substantiate that state interventions and barriers to competition created ample opportunities for rents extraction by cronies, severely hampering the performance of the private sector in Tunisia. While we have focused on authorizations and restrictions on FDI, several other policy instruments were also used to gain unfair competitive advantage and extract rents, notably through the discretionary enforcement of regulations (e.g., in tax administration, custom duties, and public procurement) and the (ab)use of public assets and public enterprises (including public banks).15 All of these practices undermine competition by favoring better-connected firms and those who practice corruption.
The inefficiencies and distortions resulting from this system of rents extraction obstruct the development of a dynamic economic environment—which is at the root of the economic stagnation of Tunisia.16 Few new firms are created, and productive firms do not grow, as they face unfair competition by crony firms.17 The emergence and expansion of innovative dynamic firms is hampered by the expensive and low-quality goods and services they need to pay to crony firms. As a result, Tunisian entrepreneurs are competitive only in labor-intensive low-skill tasks, investment has been lacking, and unemployment has been rampant. Most of the jobs created were in low-value-added activities and mostly in the informal sector, offering low wages and no job security. Such jobs certainly do not meet the aspirations of the growing number of graduates.
Tunisia’s rents-prone economic system is not only inefficient, but also highly inequitable. That such a small group of 114 entrepreneurs could appropriate such a large share of Tunisia’s wealth creation illustrates how corruption has been synonymous with social exclusion. Inequality of opportunity characterizes Tunisia today, as the current institutional infrastructure creates an “insider-outsider” culture. Even if the interventionist policies were introduced originally to foster the country’s development, they have been captured in practice for rents extraction and privileges by those who are close to those in power. The resulting inequality was a fundamental cause of the revolution and, since the economic model has not yet been changed, remains a latent source of instability in the Tunisian transition.
Lessons from the Experience of Other Democratic Transitions
Successful transitions are often associated with rapid reforms, though historically, a country that undertakes a democratic transition has only a 30 percent probability of succeeding.18 A democracy is more likely to be established when per capita GDP is high and increasing;19 income distribution is equal (low Gini coefficient or low ratio of incomes of top-to-bottom quintile); populations are small; urbanization is advanced; people are educated; gender equality in primary education is high; natural resources are limited; there is no ethnic division; the transition is not conducted by a military regime; democratic states are present in the region (the “contagion effect”);20 the time to election is minimal; the regime is not a presidential regime or not dominated completely and permanently by one political force; and the country has a parliamentary system.
There is some consensus that rapid democratic transition occurs primarily when several fundamentals are in place: per capita GDP is high,21 the middle class is large, urbanization is advanced, the percentage of people receiving primary school educations is high, gender equality in primary education is high, a military force is present before the transition, there is a previous attempt at democratization, democratic states are present in the region, and natural resources are limited. Further, although there is no empirical evidence from historical data, some scholars have noted that a democratic transition, especially in middle-income capitalist countries, might occur following years of declining growth and/or increasing inflation,22 as was the case for Latin American countries during the period of hyperinflation in the 1980s and the Asian financial crisis in 1997.
Unlike many other Arab Spring countries, which have seen their transitions fail, Tunisia has many of these fundamentals. Some of these, such as high rates of urbanization and a large middle class, Tunisia possessed before its uprisings. Others are the outcomes of choices Tunisia has made since the revolution, such as the decision to opt for a parliamentary rather than presidential system. Together, they imply that the country has a high likelihood of successfully completing its democratic transition despite the risk of backsliding that is inherent in virtually all democratic transitions.
Moving from a Closed Socioeconomic System to One That Is Open to All Citizens
How can Tunisia move from a closed socioeconomic system to an open one? Since the Ben Ali regime limited access to political and economic functions in order to generate rents, we can turn to the limited access order (LAO) framework for guidance.23 The framework is premised on the idea that power is tied to organizations and not to the individual and that rents-sharing is the process by which a dominant coalition reaches an equilibrium that allows economic activities to continue to generate rents.
Tunisia during the Ben Ali era could be characterized as a basic LAO with strong elements of predation. Few players were part of the dominant elite, which comprised the “ruling” family, the security forces, the administration, the media, civil society organizations, and business firms that allied with the political elite (or at least stayed out of politics). All other groups were marginalized or actively suppressed. In such a setting, the LAO framework offers guidance on how organizations in societies arrive at elite bargains—formal or informal agreements—to divide the available opportunities for rents extraction and profit making in the economy.
The LAO framework predicts that countries will not transition easily from limited access orders, in which rent-seeking dominates, to an open access order, which characterizes most liberal democracies. By limiting access to economic activity and resources, the LAO creates rents that help to maintain the equilibrium. Thus, there will be strong incentives for rent-seeking to continue, albeit with some changes in the cast of organizations in the dominant coalition. In other words, even if countries hold fair elections, they will not soon become open democracies, but they may mature in the range of institutions and organizations that are allowed to participate in broader decision making.
Of course, advancing the principles of economic freedom—empowerment of the individual, non-discrimination, and open competition—can weaken the rent-creation system that holds the LAO together. These changes, whether in the form of revolution or of reform, therefore threaten the basis of order and hold the risk of violence. Similarly, attempts to remove corruption, install a functioning rule of law, and institute democracy with competitive parties can also destabilize an LAO and generate broad resistance. Groups that benefit directly from market distortions, such as those reaping monopoly profits or receiving services at subsidized prices, will resist the reforms.24
It may be argued that although the revolution disrupted this equilibrium and empowered a new coalition, even after the departure of Ben Ali, most of the organizations supporting him have retained their interests and political importance. Consequently, they are likely to continue to play a role in shaping the evolving political arrangements in spite of facing increased competition among a wider set of elites, which now represent some segments of the population that had no voice or participation before.
Several political realities in Tunisia during the past four years are consistent with this characterization. New political actors have become central to negotiations about control of the economy, while interests of the previous regime have continued to play a major role. Two examples demonstrate this rebalancing.
First, when the Ennahda party, a previously banned political party, was elected to lead a coalition government (2011–2013), its term in office was marked more by bargaining and negotiation with political adversaries and interest groups than by changes in the status quo. Patronage in the form of civil service and state-owned enterprise recruitment continued, and legislation meant to change the Ben Ali–era economic policy infrastructure largely stalled.
Second, the General Union of Tunisian Workers (known by its French acronym UGTT), which had played an important role in Tunisia’s independence but was eventually coopted by the state, became a balance against both government and private-sector initiatives that threatened its interests. During the transition period, the UGTT first led protests and then negotiations, which eventually resulted in the Ennahda government’s handing over power to a technocratic government. As part of these negotiations, which included political, union, and business interests, the Ennahda government agreed to postpone plans to exclude former regime officials from running for office.
While the post-revolutionary political order included new interest groups in the form of the Ennahda party and the UGTT, these groups did not overturn the existing order, but rather added to its ranks. Moreover, the October 2014 parliamentary elections saw the return of many of these former regime officials to the political sphere.
During Tunisia’s transitional period, reforms that might challenge the existing elite bargain have been either extremely slow to develop or rejected by those who continue to hold considerable leverage. These efforts have not only stymied controversial legislation, such as the aforementioned political exclusion law. They have also prevented reforms in less controversial areas such as the Investment Incentives Code, which was the basis for much of Ben Ali’s rent-seeking.
Institutionally, extra-governmental dialogues, including both the National Dialogue negotiations25 and protest movements, have provided a means for otherwise unreformed institutional structures to deal with newly competing interests. While this has served as a way for the country to avoid winner-take-all outcomes, it has come at the expense of the democratic process (i.e., decisions by legislative bodies) and has resulted in outcomes that have failed to fulfill the expectations of revolutionaries who fought largely against these elites.
While the return of former regime elements has been cast by some as a sign of failure of the revolution, the LAO framework suggests that elections will only gradually become an arena for competition among power groups. They serve to test the relative ability of competing organizations to mobilize supporters.
Meanwhile, achieving stability will require creating institutions that avoid winner-take-all outcomes. International experience shows that sustained improvements in LAOs and moves toward open access have happened in incremental steps rather than giant leaps. Historically, incremental steps that have led to increased openness have included greater predictability in the elite bargain. Notably, experience has shown the importance of building institutions that can underpin predictable resolution of conflict between elites (i.e., to enforce the rule of law for elites). As these elite-oriented rule-of-law institutions become stronger over time, they provide a platform to move from privileges for the elite to a level playing field for all citizens.
In Tunisia, several new institutions, in the form of the new, relatively liberal constitution or various laws such as those governing freedom of association or access to information, may form the basis for greater competition among a wider cross-section of society. Granting citizens access to information will enable independent analysis of the beneficiaries of existing policies, which will also increase the pressure for policy changes. Nevertheless, the LAO framework emphasizes that trying to go straight from revolution to an open access order has often led to disruption and more fragility.26
What is yet more difficult to measure, given the extent of elite capture that continues to prevail, is whether incremental progress is taking place in the aggregate. While certain institutional reforms appear objectively to be steps forward, these have been counterbalanced by economic decision making that has remained exclusive and unequal. Even the task of creating a workable limited access order will not be easy—as we see in many other post–Arab Spring countries.
The Way Forward: Opening Economic Opportunity
to All Tunisians
Tunisia has made enormous progress in its democratic transition, and historical experience from other countries suggests that it has the key ingredients required to succeed. The challenge is to move from a fairly closed socioeconomic system, which privileges its elites and is at the root of the revolution, to a more open system for the benefit of all Tunisians.
This requires changing the policy infrastructure inherited from the Ben Ali era, which perpetuates social exclusion and invites corruption. The system of laws and regulations that allowed the family to capture such a large share of the country’s wealth remains largely in place, maintaining the opportunities for firms to earn rents through cronyism and corruption. These regulations perpetuate social exclusion, as unconnected Tunisians have very limited economic opportunities.
Without such changes, there is a risk that instead of reforming the policy infrastructure, Tunisia’s elites will collaborate just enough to share the spoils, albeit with a slightly different group of vested interests. In lieu of reforms that would level the playing field, the economic system would remain closed in favor of a small, though slightly expanded, minority of elites. Under this scenario, markets would remain closed off from competition, regulatory policy would remain subject to discretion, and decision making would be opaque.
Opening the economic system will require political determination, since fierce resistance can be expected from those who are at risk of losing rents and privileges. Moving too rapidly will likely create tension and instability, which could undermine the process. Moving too timidly, however, will fuel the frustration expressed by the marginalized groups in society.
Empowering strong independent governance institutions that enforce the rule of law on elites and vested interest groups will accelerate the change process. Enforcing citizens’ right of access to information, as well as transparency and accountability in the government, is also critical in order to arrive at a stable democracy, both in Tunisia and everywhere else.