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Manufacturing TransformationComparative Studies of Industrial Development in Africa and Emerging Asia$

Carol Newman, John Page, John Rand, Abebe Shimeles, Måns Söderbom, and Finn Tarp

Print publication date: 2016

Print ISBN-13: 9780198776987

Published to Oxford Scholarship Online: August 2016

DOI: 10.1093/acprof:oso/9780198776987.001.0001

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Tunisia

Tunisia

Industrial Policy in the Transition to Middle-income Status

Chapter:
(p.174) 9 Tunisia
Source:
Manufacturing Transformation
Author(s):

Mohamed Ayadi

Wided Mattoussi

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198776987.003.0009

Abstract and Keywords

After independence in 1956, most French civil servants withdrew from Tunisia leaving a large vacuum. The primary goal of the incoming government was to rebuild institutions and the civil service. At the time, Tunisia’s manufacturing was artisanal, dependent on agriculture, food processing, and mining. Breaking free of this mould at the beginning of the 1960s required the adoption of a corporatist structure. The economy was left to depend excessively on the public sector, which advanced import substitution. The eventual failure of this unsustainable model of collectivism led in 1969 to a strategy of combining import substitution, private sector development, and export promotion. Heavy industry, transport, water, and electricity were left to the state. Opportunities for the private sector were limited to textiles and tourism.

Keywords:   Tunisia, institutions, manufacturing, export promotion, private sector, public sector

9.1 Introduction

After independence in 1956, most French civil servants withdrew from Tunisia, leaving a large vacuum in the civil service. The primary goal of the incoming government was therefore to rebuild institutions and the civil service. At the time Tunisia’s manufacturing was artisanal, and depended on agriculture, food processing, and mining. Breaking free of this mould at the beginning of the 1960s required adoption of a corporatist structure. The economy was left to depend excessively on the public sector, which advanced import substitution (IS). The eventual failure of this unsustainable model of collectivism led in 1969 to a strategy of combining IS, private sector development, and export promotion. Heavy industry, transport, water, and electricity were, however, left to the state and opportunities for the private sector were limited to the textiles and tourism sectors.

In the 1970s the country adopted a semi-liberal infitâh policy that constituted a peculiar combination of IS and export promotion and coexistence of the public and private sectors. The private sector was involved in quick return manufacturing activities that are less capital intensive, while the state controlled the heavy industries that were believed to be beyond the capability and interest of the private sector (Bellin 1994). The infitâh policy opened up foreign trade and provided incentives aimed at encouraging the private sector to assume a more active role. These included extensive institutional and technical support deployed through new state bodies such as the API and CEPEX. In the 1970s the economy was characterized by an offshore sector (p.175) dominated by foreign investors and geared towards exports targeting external markets and dominated by foreign players; an onshore sector that was shielded from competition and regulated by the state; a public sector composed of large firms, monopolized strategic sectors; and a private sector which primarily consisted of small business units that focused on simple assembling activities.

Later, in the early 1980s, the Tunisian economy experienced a slowdown in growth and productivity. To remedy the maladies caused by economic mismanagement and the political instability of the mid-1980s, the government put in place the Economic Recovery and Structural Adjustment Programme (ERSAP) which focused on tariff reduction, facilitating quantitative restrictions on imports, the introduction of a value added tax, the reduction of personal income taxes, the devaluation of the Tunisian dinar, and negotiations with creditors that extended the maturity on the country’s foreign debt. The moderation of political instability following regime change in 1987 improved the business climate and encouraged the private sector to be more active, in particular for export-oriented activities.

During the 1990s Tunisian authorities promoted liberalizing measures through a legislative framework that encouraged foreign investment, accelerating privatization and deepening integration into the European market (UNIDO 2001). Trade remained protectionist throughout the first half of the 1990s. Since the mid-1990s, however, domestic industries have been liberalized, especially vis-à-vis ‘preferential’ trading partners. The government created several trade supports with the view to establishing a free trade agreement (FTA). At the time Tunisia was part of several trade agreements including GATT (General Agreement on Tariffs and Trade) in 1994, and subsequently became a member of the WTO (World Trade Organization) in March 1995. Tunisia became signatory to the European Union Association Agreement in July 1995 and a 1997 convention targeting the creation of an Arab free-trade zone over a period of ten years. Also, the country fostered bilateral ties with Morocco, Jordan, and Egypt further reducing tariffs. The government encouraged modernization of the industrial sector with the upgrading programme Programme de mise à niveau which was launched in 1996 and the Industrial Modernization Programme (PMI). These programmes were intended to provide firms with technical assistance, training, subsidies, and infrastructure upgrades to help them face international competition and survive in an open-market economy.

Economic policies in the 2000s provided conditions for improving the performance of the economy, developing its structure, enhancing its competitiveness, and ensuring openness requirements. These policies upgraded service companies and especially restructured hotel units, provided skills upgrading, and facilitated access to new technologies. Special programmes were put in place focusing on the development of industrial and tourist zones. Also the (p.176) quality of roads was improved and communication infrastructures modernized. More measures were put in place to support entrepreneurs in the areas of simplifying new business creation procedures, and the creation of a network of business centres of excellence. Reforms aiming at trade liberalization focused on assisting in operations of export market prospecting, and forging a partnership agreement with the EU. Tunisian authorities developed the tax system, modernized monetary policy through the implementation of open-market instruments, optimized liquidity control operations, and adopted a flexible exchange rate policy thereby reinforcing financial liberalization and facilitating transactions of national companies.

The reforms set the stage for a marked growth in GDP, domestic and foreign investment, and exports during 2002–6. The service sectors led the way, while emerging industrial activities such as the mechanical and electrical industries followed closely. Export of goods and services expanded at an average rate of 8.5 per cent, mainly due to the emergence of new export sectors such as mechanical and electrical industries, automotive components, and textile and tourism exports. Until 2010, the Tunisian economy had masked inequitable growth and high unemployment rates—particularity among educated youth. Consequently, growing youth unemployment, corruption, and political repression led to the Arab Spring and the fall of the regime.

The study outlines historical developments that informed the structure of the Tunisian industrial sector, challenges to its development, and future prospects. The remaining sections are structured as follows. Section 9.2 presents a historical background of the Tunisian economy since independence (1956). The past five decades are divided into four milestones: the period of liberalization (1956–60); the collectivism experiment (1961–9); transition to a protectionist market economy (1970–85); and a period of private investment boom, competitiveness, and openness (1986–2010). Section 9.3 evaluates the performance of the manufacturing industry over the past five decades in terms of export. Section 9.4 discusses the evolution of Tunisian industries in terms of production, exports, and foreign direct investment (FDI). Section 9.5 presents major industrial policies undertaken by the Tunisian government since independence. Section 9.6 concludes.

9.2 Evolution of Industry: Historical Perspectives

9.2.1 Initial Conditions

Following independence in 1956, most French civil servants went back home leaving a large civil service vacuum. Between 1956 and 1960, almost all 12,000 French public servants working for the Tunisian administration were obliged to repatriate. In 1960, Tunisia signed an agreement with the French government (p.177) to recover land annexed by the French government (UNIDO 2001). During the first few years following independence, the main goal of the new government was to rebuild institutions and the civil service in order to fill the institutional vacuum. At the beginning of the 1960s, Tunisia faced high illiteracy rates, and the standard of living of the majority of Tunisians was low. In 1966 poverty incidence rates were estimated at 33 per cent. Agriculture generated the largest employment and there was very little industry or tourism. The Tunisian government, naturally, put more emphasis on major dimensions of human development: education, family planning through birth control, women’s rights, and ‘eradication’ of poverty (see Ayadi et al. 2005).

9.2.2 The 1960s: ‘Collectivism’ Experiment

The 1960s were years of policy experimentation: agricultural cooperatives,1 collectivism, and state-led IS. Industrialization was state-led with the private sector playing a marginal role. These industries reduced Tunisia’s dependence on imported products, but did not create new employment in industry (Findlay 1984; Baker et al. 1999). Capital2 accumulation was by far the main source of growth in the 1960s (around 60 per cent). Investment went into capital intensive projects such as steel mills, an oil refinery, a paper plant, a couple of large textile factories, and an automobile assembly plant. Although these projects absorbed a large share of investment resources, they barely contributed to job creation.

9.2.3 The 1970s: Private Sector Development and Export Industry Promotion

Collectivism did not generate the dynamism that the government had hoped for, and eventually gave way to a strategy of combining IS, private sector development, and export promotion. The public sector nevertheless kept its grip on key sectors such as heavy industry, transport, water, and electricity; while the private sector focused on textiles and tourism. Windfalls from oil revenue, a budding private manufacturing industry, and tourism featured prominently in economic growth in the 1970s. Government helped by creating an enabling environment, setting up new institutions and new laws that promoted private sector development and foreign and domestic investment.

An Industry Promotion Agency (API) assisted investors and promoters with the administrative and legal formalities necessary for company incorporation in Tunisia. Supporting business information was provided to foreign importers (p.178) by an Export Promotion Centre (CEPEX)—both institutions were created in 1973. An investment law (Law 72-38) was adopted in (1972) offering special advantages to exporting manufacturing companies. Incentives consisted of partial or total tax exemption for periods of 10–20 years and 50 per cent reduction thereafter (granted also to partially exporting firms), full tax exemption on reinvested profits and income, total exemption from customs duties on imported capital goods, raw materials, semi-finished goods, and services. A similar law was enacted in 1974 which encouraged investment in industries producing for local markets and which was later amended in 1981. Such firms were required by law to be owned by Tunisians (at least partially) which provided them with a wide range of tax concessions (e.g. exemption from corporate income tax during the first ten years of operation and repatriation of profits free of tax). Industrial zones were managed by a new Industrial Land Agency (AFI).

These policy packages contributed to a turnaround in labour productivity. Light manufacturing and tourism grew at rates exceeding 13 per cent per annum on average. GDP growth averaged 7.5 per cent per year during the 1970s. The private sector grew rapidly under the protection of import restrictions. Between 1972 and 1977 private investment exceeded public investment and 85,500 new jobs were created in light manufacturing industries (Findlay 1984; King 1988). However, the industrial structure remained concentrated in a few sectors and regions. In 1977, 54 per cent of new investment and 87 per cent of employment were concentrated in textiles, clothing, and leather (TCL) sectors. Almost all new industries were concentrated in the northeastern region, strengthening regional disparities and encouraging further migration towards this region (UNIDO 2001).

9.2.4 Economic Mismanagement, 1977–86

At the end of the 1970s, Tunisia’s foreign debt ballooned while the economy showed no stable productive base capable of absorbing an excess labour force and exporting a diversified and competitive range of goods (Morrison and Talbi 1996). The Tunisian economy experienced further slowdown in the period between 1981 and 1986, reaching the lowest growth performance (2.8 per cent per annum) and productivity decline (around 1.5 per cent per year). The poor performance was mainly attributed to economic mismanagement and political instability. Despite low growth performance, the government instituted a public sector wage raise that inflated the wage bill. At the same time, food subsidies were maintained at record levels, representing more than 5 per cent of GDP. Inflation rose sharply to over 8 per cent while the current account deficit grew to over 10 per cent of GDP. In 1986 Tunisia registered negative growth, amid growing social unrest and labour strikes (Morrison and Talbi 1996; Baker et al. 1999; UNIDO 2001). Faced with internal imbalances (p.179) and external debt, Tunisia negotiated its first economic adjustment programme (ERSAP) in 1986 (King 1988).

9.2.5 Economic Recovery and Structural Adjustment Programme, 1986–90

The ERSAP led to tariff reductions, quantitative restrictions on imports, introduction of a value added tax, reduction in personal income taxes, devaluation of the Tunisian dinar, and negotiations with creditors to extend the maturity on the country’s US$10 billion foreign debt. The privatization programme led to the full or partial privatization of nearly 160 state-owned companies. While public investment declined, the ensuing slowdown in growth was moderate (going from 3.7 per cent during 1980–5 to 3.0 per cent per annum during 1985–90). Macroeconomic stability was restored and the external debt burden fell. In addition, there was a sharp fall in inflation (below 5 per cent in less than ten years) and a reduction in the current account deficit from 7.8 per cent of GDP in 1986 to 2.4 per cent in 1996. Fiscal discipline and the realignment of the exchange rate were instrumental in reducing public and external deficits and placing the economy on a sustainable growth trajectory. The reduction in political instability following regime change in 1987 improved the business climate creating a vibrant private sector—especially in export-oriented activities.

9.2.6 The 1990s: Global Competition

Tunisian authorities played a crucial role in influencing the private sector to cope with increased competition in global markets. A legislative framework encouraged foreign investment, while privatization measures facilitated deepening integration into European markets (UNIDO 2001). The government encouraged modernization of the industrial sector through the Programme de mise à niveau launched in 1996 and the PMI that subsequently followed. The government created several trade initiatives with a view to establishing an FTA with the EU to improve the manufacturing sector’s productivity and to increase the export share of manufacturing products. Trade remained protectionist throughout the 1980s and the first half of the 1990s. Since 1996, however, the government has gradually liberalized trade in manufacturing. Economic policies in the 1990s contributed to a steady decline in capital. During the same period, labour productivity gains became important sources of growth—real GDP grew faster than in the previous period.

9.2.7 Development of Services and Innovative Projects, Early 2000s–2011

During the period 2002–6, economic indicators including GDP, investment, FDI, and export volumes of goods and services showed steady growth. Real (p.180) GDP grew at an average rate of 4.5 per cent, despite agricultural sector stagnation on account of unfavourable climatic conditions.

The 2000s are characterized by the development of service sectors, which exhibited an average growth rate of 7.2 per cent. The mechanical and electronics industries showed promise with growth rates averaging 8.9 per cent. During the same period, the contribution from technologically intensive sectors to GDP grew to 20.4 per cent in 2006 against 16.8 per cent in 2001. Overall investment grew at an average rate of 5.1 per cent to reach TND 41.2 billion. Favourable investment policies encouraged the participation of foreign firms leading to substantial growth of FDI over the period (close to 884 joint-venture firms were established during the period).

The private sector became the dominant force in the Tunisian economy, contributing towards totals of 57.1 per cent of total investment, 85 per cent of exports, and 91 per cent of job creation. Export of goods and services grew at an average rate of 8.5 per cent, because of the emergence of new export sectors such as mechanical and electronics industries, automotive components, and textiles and tourism. Economic performance during the period relied on the preservation of internal and external financial stability—most importantly a favourable current account deficit at 2.4 per cent of GDP; a reduction in the rate of external debt to 47.9 per cent of net income; consolidation of monetary reserves; control of budget deficit, excluding donations; and privatization return to an average rate of 3.1 per cent of GDP (Republic of Tunisia 2010).

9.2.8 The Arab Spring: Tunisian Revolution of 14 January 2011

Several factors including youth unemployment, corruption, human rights violations, extreme poverty, and regional disparities sparked the Arab Spring that unseated the ruling government. Even though the Tunisian economy had exhibited strong competitiveness prior to these events, it had also masked the inequitable growth and high unemployment rates among educated youth.

9.2.8.1 Youth Unemployment

In Tunisia unemployment is concentrated in younger age cohorts. In 2008 the unemployment rate for individuals under thirty years of age was nearly 30 per cent—twice the overall unemployment rate (Haouas et al. 2012). Unemployment rates among 25–29-year-olds increased from 12.6 per cent in 1984 to 25.2 per cent in 2008 (Haouas et al. 2012).

Young university graduates were particularly disadvantaged by the deterioration of job creation. Unemployment levels among youth completing higher education grew from 3.8 per cent in 1994 to 21.6 per cent in 2008 (Haouas et al. 2012). Search friction in an environment where the education system and training are not related to the structure of the economy culminated in these (p.181) large unemployment rates. Private sector job creation remains concentrated on low-skill employment, while private investment is relatively low and tightly controlled by government.

9.2.8.2 Regional Disparities

Regional disparities in Tunisia are structural and institutional. Overall, coastal regions (such as Cap Bon, Sousse, Sfax, Mehdia) tend to be wealthier than inland regions (western, central, and southern regions); but these disparities are much more severe in Tunis, largely due to the political dominance of networks centred on the political regime. Factories (and employment prospects) have long been concentrated along Tunisia’s coast, while the interior regions were isolated from these hubs of economic activity not only by distance but, more significantly, by lack of infrastructure, transportation, and information networks. Population and economic activities are mainly concentrated in the northeast (governorate of Tunis) and the mid-east (governorate of Sfax) with coastal regions accounting for 75 per cent of non-agricultural jobs. This has been the source of a significant gap in average consumption and poverty across costal and interior regions.

In 2010, while the poverty headcount (national average) stood around 15.5 per cent, regional disparities in poverty levels were much more significant. Considerable disparity in employment opportunities across regions has persisted for decades. For instance, on average, since 2004 the unemployment rate has exceeded 22.6 per cent in the regions of Jendouba, Le Kef, Kasserine, and Gafsa. Patterns of government spending have largely failed to address these persistent regional disparities in development. Close to 65 per cent of public investment is allocated to coastal areas. As a consequence, healthcare needs in the mid-west region are largely unmet and youth illiteracy remains significantly high.

A recent World Bank study3 on inequality across the Middle East and North Africa regions suggests that marginal improvements in transportation and digital connectivity networks entail significant welfare gains for disadvantaged regions.

9.2.8.3 Economic Costs of the Arab Spring

In the wake of the revolution, investment sharply declined in almost all sectors, except the electronics sector, which saw uninterrupted growth (APII 2012). FDI flows decreased by 29.2 per cent during 2011 compared to 2010. Consequently, 182 foreign firms closed their doors (sixty-four Italian firms, sixty-one French firms, ten German firms) leading to the loss of 10,930 jobs. The decline of FDI was particularly severe in the tourism sector where losses were estimated at 83.3 per cent, while manufacturing and energy exhibited losses amounting to 42.4 per cent and 19 per cent, respectively.

(p.182) 9.2.8.4 Government Measures

The government took steps to limit losses in affected firms. Some of these measures included:

  • reduction in firms’ contributions to social security by 50 per cent

  • reduction or even abolition of firms’ tax dues for 2011

  • reduction in credit fees by two points.

The government adopted an economic and social enhancement plan (FIPA 2012), through which more investment is devoted to less developed regions. The plan provided more incentives for investment through the Tunisian financial market, allowed totally exporting firms to operate in the local market, and facilitated firm level access to liquidity.

9.2.8.5 Economic Recovery, 2012

FDI flows recovered by as much as 44 per cent, from 775.3 MTD during the first half of 2011 to 1,121.2 MTD in the first half of 2012. Compared to the same period in 2010, FDI amounts rebounded to 1,090.6 MTD, surpassing 2010 levels by about 2.8 per cent (APII 2012). During the first few months of 2012, seventy-one foreign firms were created giving rise to 6,731 new jobs. FDI was mainly concentrated in energy and manufacturing sectors (APII 2012).

9.3 The Structure of Industry

After a half century of rapid growth, the structure of the Tunisian economy changed. While industry and services shares in output have increased, that of agriculture has gradually decreased. Manufacturing was the fastest growing sector (particularly textile and garment). Excluding the agro-food industry, manufacturing value added grew at 11 per cent annually over about four decades, until 2000. By the year 2000 the textile and garment sector accounted for almost half of total manufacturing employment and 14 per cent of total employment. The rapid growth of this made it easier to absorb a large portion of low-skilled, active female population from neighbouring rural areas (Ayadi et al. 2005). During the period 2000–7, the contribution from industry to GDP stood at 29.2 per cent and its growth rate averaged 4.2 per cent (Chemingui and Sánchez 2011).

9.3.1 Three Pillars of the Tunisian Manufacturing Industry

In 2007, three sectors accounted for 87 per cent of exports, close to 62 per cent of FDI, and more than 83 per cent of jobs in the manufacturing sector—textile and footwear, agro-food processing, and the electronics industry.

(p.183) 9.3.1.1 Textile/Clothing and Leather/Footwear Industries

The Tunisian textile industry gradually evolved from subcontracting4 to co-contracting, and subsequently to finished goods, to become the fifth largest supplier to the EU. The majority of businesses making up the sector produces for export markets. This includes more than 1,700 textile firms and more than 200 leather/footwear firms. There are 1,500 ready-to-wear garment manufacturers and 200 hosiery concerns, accounting for more than 70 per cent of exports by the sector. The leather and footwear industry is dominated by shoes-and-uppers producers. More than 220 firms out of a total of 300 businesses are engaged in the production of shoes and leather uppers.

9.3.1.2 Agro-Food Industries

Exports increased by almost 300 per cent during 2002–7 to TND 1,616 million, up from TND 557 million in the previous period. Firms in the agro-food sector employing at least ten or more people number over 1,000. One hundred and fifty-six of these firms are full exporters while close to 104 are financed partially by foreign holdings. Firms producing oils and fats, and cereals, and handling cold storage represent almost 70 per cent of the overall number of businesses in this sector.

9.3.1.3 Mechanical/Electrical/Electronic Industries

These industries accounted for more than 30 per cent of industrial exports in 2007. During 2002–7, exports were growing at an annual rate of more than 20 per cent.

9.3.2 Evolution of Manufacturing Industry: More Competitiveness and Openness

The share of industry in GDP and total employment stood at 30 per cent and 32.5 per cent respectively in 2007. TCL industries benefited greatly from export promotion strategies which had been instituted in the 1970s with the aim of strengthening light industry beyond traditional food processing activities.

The decades following independence were dominated by an import-oriented industrial strategy. At the beginning of the 1980s, the manufacturing sector accounted for 15 per cent of GDP. Over five decades, the structure of the industry changed significantly with the growth of the chemical and textile (p.184) sectors. The relative importance of exports continued as a result of the structural adjustment policy instituted in 1986 and later, with the Barcelona Declaration (1995).5

The progressive elimination of import tariffs and ensuing global competition provided an incentive for Tunisian firms to raise productivity. During 1983–7, the effects of the second oil crisis were still being felt and Tunisia faced severe economic and financial crises resulting from the decline in oil export earnings and net remittances (Morrison and Talbi 1996). A more restrictive external trade policy was instituted to stem the balance of payments crisis and the sharp fall in external reserves.

During 1987–95, and consequent to the adoption of structural adjustment policies, Tunisia joined GATT and became a signatory to the WTO. In addition to the multilateral approach to trade policy, a stronger Euro-Mediterranean partnership grew out of the Barcelona Declaration (1995).

Gradually, domestic demand became a key driver of real GDP growth especially during periods of global recession. During the past two decades, private consumption has contributed to growth and compensated for the decline in foreign demand during global recessions. Private consumption remains one of the main drivers of growth and occupies a central place in Tunisia’s development strategy (Chemingui and Sánchez 2011).

9.3.2.1 Export and Offshoring

More recently, close to 70 per cent of manufacturing exports have come from firms that have benefited from offshore status since 1972. The major trading partners are France, Italy, Spain, and Germany. Up until the mid-1980s, export products exhibited high dependence on factor endowments, primarily natural resources (such as petroleum and derived products). Between 2000 and 2003, manufactured exports accounted for 80 per cent of the total exported. In June 2010, there were 5,840 industrial companies registered with the Industrial Agency Centre (API), 48 per cent of which exported all of their production (offshore sector). During the same period, Tunisia’s exports of machinery and electrical products became the largest export sector. More than 80 per cent of industrial exports are shipped to European markets and close to 2,200 industrial European firms operate in Tunisia. Exports to EU countries have expanded more than 10 per cent annually since 1996.

Tunisia’s exports are concentrated on a few products. For instance, the textile and agro-food sectors represent 50 per cent of production and 60 per cent of (p.185) employment. Export destinations are limited to a handful of EU countries (France, Germany, and Italy) and face strong competition from Asian exporters—China and India and Eastern European countries—that have higher productive costs and face lower labour costs.

Tunisian exports of manufactured products are mainly concentrated on textile and clothing, which constitute almost 70 per cent of manufactured products. However, a number of new products have emerged strongly from EU countries. For instance beam wire exports have targeted European mass-produced vehicles, electronic components, certain plastic products, essential oils, and detergents.

Several modernization and upgrading programmes (mise à niveau) were implemented to enhance the competitiveness of Tunisian firms including the upgrading programme launched in 1996 and supported by the PMI partially funded by the EU. These programmes aided firms in their efforts to modernize equipment, resources, and governance strategies. This has improved the competitiveness of Tunisian firms, now consequently leading the expansion of industrial exports to 84 per cent of overall exports in 2007, up from 40 per cent in 1995.

The textile sector which accounted for 40 per cent of exports and 46 per cent of employment in 2005 faces persistent competition from lower cost and efficient Asian producers and exports including China. Tunisian wages in the sector are relatively high compared to other exporters such as China. On average, a Tunisian worker earns a monthly salary of €115–130 (40–48-hour working week), while a Chinese worker receives between 50 and 60 per cent less.

Tunisia is the fourth largest exporter of textiles to the EU. Current estimates by the World Bank indicate that one-third of the 250,000 jobs in the sector are threatened. The economy’s continued dependence on low-cost production and traditional export sectors make it vulnerable to low-cost competitors. Export-oriented sectors, textile, and electromechanical equipment industries, in particular, have been weakly integrated into the rest of the economy (Chemingui and Sánchez 2011). Thus, only growth in high technology products is bound to absorb highly skilled unemployed Tunisians.

9.4 Industrial Policy

9.4.1 Foreign Direct Investment

Tunisian policy makers have instituted many measures over the past decades in a bid to spur on modern technology, enhance productivity, and stimulate (p.186) export-led growth by attracting FDI. The government provided a wide range of incentives including:

  • tax relief up to 35 per cent on reinvested revenues and profits (30 per cent beginning in 2007);

  • exemptions from customs duties and a 10 per cent reduction in VAT for imported capital goods having no Tunisian manufacturing equivalent;

  • suspension of VAT and sales tax on locally produced equipment at company start-up and an optional depreciation schedule for capital equipment older than seven years.

In 1972, an investment law provided special benefits for manufacturing companies producing for export. The regulation has been successful in attracting foreign involvement, particularly in the textile industry. The investment laws provided incentives consisting of:

  • partial or total tax exemption for periods of 10–20 years and 50 per cent reduction thereafter (granted also to partially exporting firms);

  • full tax exemption on reinvested profits and income;

  • total exemption from customs duties on imported capital goods, raw materials, semi-finished goods, and services necessary for business.

A similar law was enacted in 1974 (amended in 1981) with the aim of encouraging investment in industries producing for local markets.

  • The statute required firms eligible for benefits to be partially owned by a Tunisian (in many cases conditional on majority ownership).

  • An amendment to the law in 1981 offered incentives for investment in less developed regions.

In the 1990s, the ratio of net FDI flows to GDP reached 2.2 per cent. FDI distribution by sector revealed that until the first half of the 1990s, FDI was mainly directed towards the petroleum and gas sector (about 80 per cent against 8 per cent for the manufacturing sector). By 1998, and following a successful privatization programme, the share of total FDI in the manufacturing sector grew substantially compared to the petroleum and gas sector (35 per cent and 58 per cent respectively).

The annual investment flow of FDI to Tunisia peaked at US$778.8 million in 2000, up from US$368 million in 1999. The annual investment flow fell following the global economic slowdown of 2001 and the September 2001 terrorist attacks in the United States. FDI flow to Tunisia fell from US$486 million in 2001 to US$402 million in 2002. Nevertheless, in 2002, the manufacturing sector accounted for 84 per cent of foreign owned firms in the country and 90 per cent of new jobs created.

(p.187) The Tunisian government has been relatively successful in creating an attractive environment for export-oriented foreign investors. The country is rapidly becoming an attractive destination for European investment due to geographical and cultural proximity. But even firms from the BRIC countries (Brazil, Russia, India, and China) and North America have expanded investment. Kearney’s Global Services Location Index (GSLI), ranked Tunisia as the seventeenth most attractive offshoring6 destination in the world. The GSLI, which analyses and ranks the top fifty countries worldwide for locating outsourcing activities, bases its index on forty-three measurements, grouped into three categories: financial attractiveness, people and skills, and availability and business environment.

The report indicates that the geography of offshoring is rapidly shifting, with the Middle East and North Africa emerging as key offshoring destinations because of their size, high literacy rates, and proximity to Europe. Currently, 3,000 foreign companies are operating in Tunisia. The country has earmarked 7.5 per cent of its GDP for the education sector and 1.25 per cent for scientific research and innovation.

9.4.2 R&D and Innovation Policies in Tunisia

The mise à niveau is an industrial upgrading programme instituted in 19967 targeting strategic sectors of the national economy. Launched in a pilot in 1996, the programme was supported in part by EU grants and consisted of technical assistance, training, subsidies, and infrastructure upgrades with the aim of restructuring and modernizing Tunisia’s private sector.

During 1997–2006, the Ministry of Higher Education Scientific Research and Technology (MHESRT) reported the value of credits allocated to research and development (R&D) to have reached TND 430 million in 2006 from TND 89 million in 1997. According to the office of planning and programming studies, the number of researchers in full-time positions reached 15,833 individuals in 2006 against 6,563 in 1998. During the period 1998–2006, the number of researchers per million inhabitants more than doubled, from 2.14 to 4.52.

The number of national patents filed has significantly increased, from 160 in 1990 to 338 in 2005. Foreign investors own a majority of the patents (MHESRT). Between 1996 and 2005, only ten patents were filed by Tunisian companies in the United States Patent and Trademark Office (USPTO)—a very (p.188) small number as compared to other European and Mediterranean countries. The number of patents filed in the USPTO by partner countries between 1996 and 2005 stood at 42,464 for France, 19,334 for Italy, 3,651 for Spain, twenty-six for Jordan, thirty-one for Morocco, and ninety-one for Egypt.

9.5 Sunrise and Sunset Industries

In this section the sunrise and sunset industries are presented in terms of production, exports, and FDI.

9.5.1 Production, Investment, and Exports: Overview

Table 9.1 Industrial production trend, 2004–8

Sector

2004

2005

2006

2007

2008

Annual growth rate (%)

Chemical and rubber

2,857

3,041

3,179

3,564

8,958

33

Leather and shoes

2,095

2,520

3,010

3,864

4,536

21

Electrical and electronic

3,051

1,280

3,271

4,611

5,681

17

Mechanical

2,169

2,305

2,851

3,254

3,706

14

Agro-food

6,784

7,060

7,888

8,615

9,927

10

Building materials

1,832

1,963

2,211

2,350

2,584

9

Miscellaneous industries

2,312

2,477

2,616

2,805

3,009

7

Textile and clothing

5,191

5,120

4,876

5,341

5,364

1

Total

26,291

25,766

29,902

34,404

43,765

14

Source: Based on data from Ministère du développement et de la coopération internationale (MDCI 2012).

During 2004–8, the manufacturing sector grew at an annual rate of 14 per cent. However, not all sectors have experienced similar growth. While the textile and garment production sub-sector stagnated, with annual growth limited to 1 per cent during 2004–8, the electronics and chemical sub-sectors grew at annual rates of 21 per cent and 33 per cent, respectively (Table 9.1).

The growth in investment accounted for much of the growth in the manufacturing sector. Investment is still more concentrated on old industries, notably textile and garment (TND 1,364 million in 2008) rather than technology intensive sectors such as the electronics industry (TND 146 million in 2008).

Table 9.2 Industrial exports trend, 2004–8

Sector

2004

2005

2006

2007

2008

Annual growth rate (%)

Agro-food

1,227

1,233

1,599

1,616

1,850

11

Building materials

172

204

272

302

375

22

Mechanical

694

806

1,022

1,554

1,928

29

Electrical and electronic

1,861

2,184

2,661

3,464

4,217

23

Chemical and rubber

1,113

1,307

1,430

1,731

3,499

33

Textile and clothing

4,481

4,452

4,422

5,185

5,183

4

Leather and shoes

621

685

726

875

894

10

Miscellaneous industries

477

475

622

836

1,005

20

Total

10,646

11,346

12,754

15,563

18,951

16

Source: Based on data from Ministère du développement et de la coopération international (MDCI 2012).

Manufacturing exports represent 80 per cent of total national exports. Their levels have shown a steady rise with annual growth averaging around 16 per cent (during 2004–8). However, export growth rates differ by sub-sector. For instance, chemical product exports grew at an annual rate of around 33 per cent, while mechanical products exports and electronics exports grew at annual rates of 29 per cent and 22 per cent, respectively. In turn, the textile and garment exports have experienced a low growth rate which barely reaches 4 per cent per year (Table 9.2).

(p.189) 9.6 Conclusions

The Tunisian economy has undergone substantial structural change since independence in 1956. The economy has transited from liberalism, through a brief stint of collectivism, to a full-fledged market economy. The relatively closed and inward-oriented state-driven economy, heavily dependent on the public sector and insulated from foreign competition, has given way to an increasingly outward-oriented and export-oriented market economy. Currently, a modern and competitive manufacturing industry is at the centre of economic growth and holds the key to future economic prosperity. Past records of consistent growth have often masked inequality, regional disparities, and high unemployment rates among educated youth.

However, the gradual transformation of the economy towards technologically sophisticated manufactured exports is expected to absorb portions of the educated youth by creating opportunities for highly skilled jobs. More measures are being taken by the government to make sure that regional disparities are addressed. The government has expressed intentions to channel public investment to improve infrastructure projects in marginalized regions with the aim of attracting private investment. Statutory frameworks are being revised to accommodate objective criteria for selecting investment projects.

References

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Notes:

(1) Cooperatives were also promoted in other economic sectors: all traders and several craftsmen were forced to join the cooperatives (Morrison and Talbi 1996; UNIDO 2001).

(2) In turn, labour barely contributed to growth with a rate almost equal to 10 per cent.

(3) Brisson and Krontiris (2012).

(4) Industrial initiatives in Tunisia up until the late 1990s often handled just a limited part of the production process (task-based production). Companies today are no longer interested in handling only isolated portions of production, even if they are productive and profitable. Interest lies in coordinating links between various sites, leading to total immersion of Tunisian industry in other research, production, and service or distribution entities.

(5) In November 1995, the Barcelona Declaration established a global framework geared towards strengthening a multidimensional partnership between the EU and twelve South and East Mediterranean (SEM) countries, including Tunisia. The main objective of this declaration was to promote shared prosperity on both sides of the Mediterranean Sea, mainly through the development of regional trade—liberalization of trade in goods by both parties by 2008.

(6) Offshoring defines the delocalization of service or production activities of certain firms towards countries exhibiting low wages or other advantages. This phenomenon was started after 1970 by American firms. After avoiding it for a long period, European firms became progressively more conscious of the advantage of reducing costs by delocalizing their firms. Firms could find the necessary competencies for their development by dealing with specialized subcontractors from other countries: in such a case, we speak of outsourcing offshore. If these firms are filial, we then talk about foreign direct investment.

(7) The programme was first adopted in 1995 and successively revised over time.